Update on this situation.
So apparently there was a leak between the NV3550 and the transfer case which was causing the the transfer case to be overfilled by the transmission. Tho not visible from the outside as I could see no evidence of a transmission leak. The down side to this is that I now have a burned up nv3550, with only 12,000 miles on it. Merry Christmas to me!
I am told the cause could be from not replacing the input shaft seal on the transfer case when doing the SYE kit.
Previous owner is also curious as he is the one who installed the new transmission and the SYE!
Anyone hear of this before, or have any experience with such failures?