Yup, any hydraulic part that sits for years is likely to fail, and wheel cylinder failures are common. They are at the lowest point of the system, so moisture in the fluid migrates there and corrodes it from the inside out.
#2 is where you need to disconnect it. You should not use a normal wrench on these line fittings, as there is a very great risk of rounding off the fitting (as you have now seen). You should have used a flare nut wrench instead. But it may now be too late even for that, and you may need to use a vice-grips or something similar to get it loose. Unfortunately, to get it back tight again, you may now have to replace the metal line itself - which runs from #1 to #2.
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