np231?
Granted this is a "shift on the fly" transfer case it is not intended to be shifted under a load, this encompasses accelerating and engine braking through the drivetrain. Doing so can cause damage to the case internals.
Start by inspecting the bushings and pivot points in the linkage.
Unhook the linkage from the lever on the transfer case and manually shift the case with the lever, take note of where lever sits while in the various ranges. Hook the linkage back up and have a friend shift the case, verify that the linkage is moving the lever properly, if it isnt, try adjusting the linkage. These need to be ruled out.
If this reveals nothing you will have to split the case and start inspecting parts.
Check fluid level and condition as well.