Hello,
You can see the DNS servers used with the following command:
cat /tmp/resolv.conf.d/resolv.conf.auto
When a DNS server is added, a new list is generated.
If the interface on which you configured the DNS server is down, this DNS server will not be in that list of DNS servers. Now, when you do an initial lookup, DNSMasq send a DNS query to all servers in the list, and resolve is based on whichever server responds first. Generally, based on the domain, many of the requests will be sent to the most reliable server, but the other servers can also be used. Thus, could you please try adding a DNS server to the LAN network as well to see if it helps?
Kind Regards,