The transfer case is capable of oiling itself when towed in neutral, but neither the auto nor the standard transmission will pump oil when driven by the TC and the engine not running. This is why you are instructed to tow with the transmission in park (auto) or in gear (standard) and the TC in neutral. If you towed it far enough this way you are going to have problems from running the transmission unlubricated. The other thing you could have done was to remove the rear drive shaft.
The most likely cause of the TC not going into neutral is the shift mechanism being stiff from disuse. That is the main reason we take our rigs off road, to keep the TC shift mechanism in working order. ;^) You could of course have a bad TC, but that is unlikely. Most people who own these vehicles seldom if ever put them in 4wd.
I have good results with Kodak EasyShare,
Earle