It's the first scenario. I start machine in neutral and then shift into 2nd with clutch depressed. With clutch still depressed I can shift into any gear without grinding. Much of time I can go from neutral into any gear without grinding but occasionally if it starts to grind, I just find 2nd and I'm good to shift again.
So I think it is the flywheel clutch brake which per the book can be adjusted but the instructions weren't very clear to me. And as was mentioned, without removing gas tank, it's really hard to see into. So unless my trick of using 2nd stops working or the shifting gets worse, I guess I'll leave it be. Unless there is a simple way to get to and adjust clutch brake

The Cat 15 service manual (I dont believe there is a 22 service manual) tells how to change the lining on the clutch brake while in place. I read it and looked in there and think it would be impossible without pulling the engine. The 15 service manual has much of the information for a 22 but there are some differences that you have to figure out or do like I do and go ACMOC I need help. Great group here. Warning, Jensales manuals have such poor pictures that you can hardly tell anything from the photos. Grant.