A couple of videos would be really helpful here. First: a video of the loco trying to navigate the curve. Run the loco by itself as slowly as you can. You said the wheels lifted up by a centimeter(!) Are you sure the curves are O42? Did someone bend the track or force it to fit? Did you butt the sections together tightly at the pin, or is there a sharp-edged gap which can snag the wheels? Is the track level? Did you check for a narrow spot or "pinch point" in the gauge?
The second video I would like to see, is the loco running upside-down in a cradle. You stated that the wheels were "crooked." Do you mean that they have a wobble? If this train fell to the floor, it could have a bent wheel or axle that would affect operation, especially on the minimum-rated curve. Unfortunately the way these are made, replacing a bent axle is an expert-level repair. The average person would have to buy a whole new chassis with the wheels already installed.
Last point: Do you have another Lionel Hudson (773, 783, 784, 1-700E) that you could test and/or measure for comparison? My 785 WILL negotiate O42 curves, just not as well as my other Lionel Hudsons with the narrower powdered-iron wheels. I swear it's because the spoked wheels are gauged wider, probably out of necessity to clear the side plates, which the originals (prewar 700E, 763E) never had.
