Conditions for Setting the DTC
WARNING: This page is about a different car, the 2007 Hummer H2. However, it is still accessible from the selected car via links, so may be relevant.
The transfer case shift control module can command the low side driver on the encoder signal return circuit not to pull the signal low. The module can then read the voltage on each of the encoder channel circuits. If the voltage is low a short to ground is indicated and the DTC is logged.