I've never seen or heard of a transfer case issue, either the AWD or 4x4, prevent the shifter from working. I've driven all of my 4x4 trucks in 4hi, which would be the same as the AWD staying engaged, on dry asphalt and the shifter was never affected except that maybe the truck lurched a bit as the front and rear drives were bound up and the parking pawl released hard. Also never heard the rear diff become noisy.
I would remove the encoder motor and let the transfer case release itself, which it should while driving. If it does, I would suspect the new encoder motor as bad (just because it's new doesn't necessarily mean it's good). If still getting the symptoms, try to move the shifter shaft with some pliers to see if that releases the front driveshaft. If the front driveshaft is still not free to turn with the front wheels in the air, I'd remove the front drive shaft just to confirm this releases the front wheels and symptoms disappear. If the symptoms do disappear, I'd look at the transfer case.
Noises could also be caused by a bad front or rear diff or the front disconnect, which doesn't disconnect, is bad. Another possibility is something with the tranny.