I have a 1987 subaru gl AT-4WD-1.8 LITER The transfer case keeps filling up with fluid from the transmission.I took it to a mechanic and he did not know how to fix it.Need a subaru man who knows whats going on.  Help! 

Find an automatic trans specialist. Unlike the manuals, the front diff and gear ratio areas are separate & have a seal on the shafts to keep their fluids separate. I'd bet that seal has worn out.

Often when seals wear they also leave a wear lip where they should seal resulting in sooner rather than later another leak as the seal lip does not have enough tension on the sealing lip, There is a trick to increase the tension on the seal lip the spring that applies the tension to the seal lip can be shortened to apply extra tension on the sealing lip to take into account wear on the shaft front Pulley or whatever it is supposed to run on and seal.

 

If you have a close look at the spring after you pull it out of a seal they are joined together by twisting, One end is actually a cone shape to screw into the other end which is a normal end if you look carefully you will see the join and untwisting it will separate the spring into one long straight tension spring, Simply cut from between 2mm to 3mm from the straight end so as to allow the cone shaped end to twist back into it and voila one shorter spring that applies more tension to the sealing lip of the seal, I suggest practicing on a the spring from an old seal to perfect the technique before doing same to a new replacement seal if you have wear where the seal lip runs.

I am working on a few of my 3 speed auto transmissions. Yes, it sounds like the seals between the atf transmission and the differential case are bad. The pinion bearings may be bad and caused this, so be sure to check then also. Pretty much full disassembly to get to the seals. From what I have seen so far, in my 3ATs, all over 150,000 to over 220,000 miles, the main thing that fails is the pump drive shaft, so if you have the transmission out, check the splines on the pump end. It just pulls out, easy check.

OP said transfer case ,not differential.

The tranfer case is supposed to be filled w/ATF.

In a 3AT , the transfer case is not really separate lubrication wise, from the atf. There is only one fill for atf, and one for the differential gear lube. Maybe I jumped to the conclusion that he has a 3at? The 4 at I am not familiar with.