Early stages, everyone plenty deep.

I raise 98754 in CO, bb 3bets, I flat
1st draw: CO stands pat, Hero?

Should I have 4bet so I can get CO to break marginal hands, stand pat, and bet down?

I think 4b/pat, hoping he breaks, is the best line. When BB 3!, we can assume he has D1 or pat hand. Even if he pats after we cap pre, I'd still take a shot at getting him to break on the 2nd draw, by firing a flop bet. If he doesn't break, I'd pretty much give up and D2 to 754xx.

The next best option would seem to be playing it the way you did and drawing to 754xx. If UI on 1st, we'd still have to peel flop and D2 again, before folding to the big bet if we don't catch a deuce (maybe a trey, or snowing combos as well). The main reason I prefer the 4b/pat is that by capping pre, we could force BB to make a big mistake that could propel us from drawing dead, to being the favorite to win a medium-sized pot. It's our best chance to make lemonade out of lemons.

Calling and drawing 1 to 8754x seems to be the worst of the 3 options.

It’s indeed a lemon spot as we are actually a sizeable underdog to most D1s. Weighted average is probably less than 40% equity.

When Villain stands Pat on D1 after the 3Bet Pre I suspect that you are minimally up against an 8 low.

Unless Villain is on some Meta Game level and crooking you by staying Pat and seeing if you break hand first (which happens).
If your spider sense is going off maybe stand Pat as well on D1. See if Villain flinches on D2

If you think up against a made hand then
I would draw two and check-call on draw D2 and D3
And Heavy Sigh when/if beat by an 8 low.

What hands do you think Villain may break?

Definately 10, Probably 9 low maybe 8 low depending on how convincing you are and what his other cards are.

After a time of getting garbage and pairs on your draws, and watching people raking cheques with J/10, a Villian's 8 and 9 lows start looking good especially if people are drawing behind you and you are standing and betting.

I think people have impression that draw games are straight forward.
There is room for shenanigans and plenty of people willing to bet against your ability to draw magic cards that complete your hand.

BB shouldn't be patting any Ts pre-draw (I would think?) and hands like 96543/87643 can't really break. The only hands I think BB might 3! w the intention of patting, and then change to D1 if we cap, could maybe be 95432, 96542, 97543, 87632.

I think we could also cap, under the assumption BB is going to usually have D1, and then D2 to 754xx on the first draw, if/when he pats. One factor I hadn't considered is the tilt equity we pick up if we cap/D2 and make a 7 against his 86.

Yeah that’s what I was going to get at, the universe of hands is quite small.

But mostly all moot anyway. Ratio of D1s to Pat is around 10 to 1. It’s a cap anyway as a pat againsts a D1. As I mentioned hot/cold equity isn’t good against D1s but villain has to know to stay with a 9 after 1st and 2nd draw. So playing it out you may win around 45% of time

Fold if you get c/r at any point.