the transfercase uses blue GM trac II transfercase fluid. you will need 3 qts. uses 2.25QTS. the fluid should be blue or a gray blue color. if black you will need a complete rebuild.
the TRANSMISSION USES DEXRON VI NOT DEXRON III. DEXRON III was removed in 2006 because it is a damaging acid creating fluid/ poor quality. cost GM too much in warrantee work so they no longer license this spec fluid.
recheck those drive train codes again. the computer module is how the jack up the cost. yes it is very possible its just a wiring problem , cheap if you fix it very expensive if they fix it because they will change everything else first ..you get what I'm saying here !
the encoder could be open or shorted. could be the encoder internal position sensor is messed up. could be the transfercase encoder fork is binding up preventing movement. shorts to the transfercase of the small wires from the fuse block harness.