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Common problem - you just need to change the transfercase fluid. Since the transfercase uses a clutch system to activate the front wheels, it has a friction modifier added to the fluid (like a rear LSD). When this friction modifier wears out, the clutches can't slip like they are supposed to and you get this "lurching" or "binding" feeling.
There's a specific fluid BMW sells for the transfercase - I'm pretty sure you could use any differential fluid with a friction modifier, but the cost difference isn't much so I'd just use the BMW fluid.
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