Transfer Case Power Distribution Question 98 Exp

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I am 90% done with the install of a used transfer case in my 98 Expedition 5.4 4x4.
There was a pretty noticable grinding noise coming from the old transfer case upon engine braking loads, and mostly when things got heated up after a couple miles of driving. About 10,000 miles ago, I heard that noise when the truck was up in the air on a lift and definately coming from transfer case when the engine was heated up and thetransmission in gear and the wheels spinning. We changed the fluid in the transfer case and that worked to fix the problem for about 10,000 miles and now the grinding noise came back, but worse.

So when I removed the old transfer case, the front drive shaft would spin freely with the front wheels in contact with the ground and the transmission in park.
Now with the replacement transfer case in place, the front drive shaft will not turn (by Hand) with the wheels in contact with the ground and transmission in park and the transfer case in 2 wheel drive mode. When I lift the drivers side front wheel off the ground, the front drive shaft spins with the rotation of the wheel (Rear drive shaft is not in place yet).

My question now is, what is the correct power distribution from the transfer case to the wheels? Is it correct that I should not be able to turn the front drive shaft by hand with the wheels in contact with the ground and the transmission in park?
 
Was the donor vehicle part time, full time, or awd? Do you have manual or auto locking hubs?
With auto locking hubs, they will lock when you turn the shaft by hand.

In 2wdthe with manual hubs unlocked will be able to turn the shaft by hand.
 
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