518 46rh help please

could it be possible that the servo cover is leaking enough to spill out my pressure to release the band?

I don't think so. What does the air-pressure test say?

What kindof line pressure are you getting?
The 2-3 shift valve relays pressure to the hi-drum for to get direct third gear. Simultaneously, that pressure disengages second gear. But where does the 2-3 valve get it's pressure from? Why, from the 1-2 valve! at the command of the governor. So if the 1-2 valve doesn't move, the 2-3 will not get supply.With no governor pressure, you will never get third gear. Fix the governor pressure and that will fix the third gear.
The gov circuit is pretty simple, feeding just the two governor plugs and also the shuttle valve. Throttle pressure is supposed to keep the shuttle valve in the closed position. When you do a lift foot shift, throttle pressure drops and if it drops far enough, it will dump the governor pressure. No gov pressure, no third gear.The shuttle valve also seems to do something between the shifts sending fluid to the modulator, so my guess is that it smooths the shift.
OK, but what if there is no throttle pressure? Well, the way I read the diagrams, if there is no throttle pressure, the shuttle valve could be dumping governor pressure full time.
So then the question becomes; do we have throttle pressure or is the shuttle valve stuck open?
Well if you had no throttle pressure, and no governor pressure, the trans would not upshift.
If the throttle pressure only, worked, you would have no 1-2 upshift.
If the governor only worked, you would have a very early 1-2 upshift.
If the shuttle was dumping but everything else was working, you would have a very late 1-2 upshift..............................
So, if the air-pressure test says everything is OK, and the governor itself is working, then Ima looking at the shuttle-valve next.

But I gotta mention that the governor gets it's supply from the manual valve, so if it is not detenting properly, then I suppose the governor may not be getting full line pressure.
That's the best I got