Ok, sorry for the late update. Turns out it was not the transfer case. What had happened is the pin going through the carrier came out and was hitting all around in the axle and sometimes jamming not allowing the axle to move which resulted in a pop, kind of like brakes popping. It has torn up enough stuff that the shop just ordered a whole new already setup 3rd from toyota. Problem solved. $1600.
We only had to pay $25 because we have an extended powertrain warrantee on it.
