Here is the encoder motor connector and circuits. I would unplug the encoder, replace the fuse and check for good ground at terminal A on the connector side. If that is good check for 8v at E. Then at the motor, check to see if E is grounded. If it is you have a bad encoder motor.
Here is a description of the Encoder motor on the transfer case.
The TCCM operates the motor/encoder in one direction by energizing one relay while the second relay is de–energized. The TCCM operates the motor in the reverse direction by energizing the second relay while the first relay is de–energized. The encoder part of the motor/encoder sends shift positioning signals to the TCCM.
The motor/encoder converts a shaft position, representing a mode of range selection, into electrical signals for use by the TCCM. By interpreting the four channels (P, A, B, C) of the encoder, the transfer case control module can detect what position the transfer case is in 2HI, 4HI, 4LO, or in transition between any of the two.
The four hall effect sensors of the motor/encoder are used for channels (A, B, C, and P). These sensors provide a path to ground when a magnet passes over them. A rotating magnetic ring causes the hall effect sensors voltage to drop from 5 to 0 volts. The TCCM detects the voltage of all the channels and interprets the current transfer case shift position.
Encoder Signal Ground
Encoder Output - Channel A
Encoder Output - Channel C
Encoder Output - Channel B
Reference Voltage Input - 8 V
Encoder Output - Channel P