There's a seal at the transmission output shaft and one at the input shaft of the transfer case. Physically they are less than 4" apart. There's a fiber gasket between the two units where they bolt together. The purpose of the gasket is to keep dirt out, not to keep fluid in, (the seals do that). The only way the fluid can transfer from transmission to transfer case is if there is a negative pressure, (vacuum) in the transfer case strong enough to pull the fluid past the seals. The only way for vacuum to get into the transfer case, is if the vacuum switch is leaking vacuum past the seals inside the switch, or for some odd reason there is vacuum applied to the steel vent pipe on the top of the transfer case. I am not an artist, never claimed to be, bare with me on the rough, and I do mean rough, drawing:
