The damaged shim was in front of the pinion spacer. It may have been beat out by the pinion moving back and forth, but the other shim beside it was okay, so I think that the shim slipped out of place during installation. Just a guess on my part.

I know that the drag radials did not play a role in this mess, I only mentioned them as a point of reference on my question about spool vs Sure Grip.

And it has the green bearings with aftermarket axles. So that is a good tip to check the length of the axles. Thank you.