Bankruptcy Brings New Twist to McClung Warehouses Saga

On the face of it, a February ruling in U.S. Bankruptcy Court seems to have finally brought to an end nearly two decades of agonizing stasis in the would-be redevelopment saga of the old McClung Warehouses on Jackson Avenue.

But there was a certain simplicity in that stasis, a comfortable predictability. Warehouse owner Mark Saroff would fumble about, press a feckless lawsuit or two, announce grandiose plans that would come to no good end. KCDC and the City of Knoxville's various redevelopment groups would rumble and fume. And no one was really happy, but at least everyone knew what to expect, and what to do.

Now Judge Richard Stair has forced Saroff into involuntary Chapter 7 bankruptcy at the behest of four creditors, and everything's gotten more complicated.

The four creditors are Azur Properties Group, Craig Belitz Construction, Inc., law firm Merchant and Gould, and architect Michael Scott. According to local attorney Robert Bailey, who is representing all four, Saroff owes a total of around $370,000 for loans, demolitions, legal services, and architectural work.

Saroff had 10 days to appeal Stair's decision, but the deadline has passed. Losing his attorney nearly two months ago probably didn't help; former Saroff counsel Bill Maddox says he can't discuss his departure from the Saroff case. "One day, he just filed a motion to withdraw," says Bailey, of Maddox. "He said Mr. Saroff wasn't cooperating at the level he thought he needed, so the judge allowed him to withdraw."

Bailey added that the remainder of the proceedings, during which Saroff failed to hire another attorney and essentially represented himself, were "interesting, if nothing else. The judge got a little tired as time went by."

Under Chapter 7, Saroff's assets will be liquidated, and Bailey says Saroff has filed a summary sheet claiming just over $6 million in assets, most of it vested in the warehouse lots, despite a fire that ravaged the properties in February 2007. Saroff also listed Sevierville properties in which he owns a 20 percent partnership, Bailey says.

Trouble is, anyone who's followed Saroff's very public accumulation of debt since he began acquiring the warehouse properties in the early 1990s knows that the $370,000 he owes the petitioning creditors is a mere drop in a very large bucket that holds some of his long-standing debts, such as the multi-million dollar second mortgage held by local attorney Arnold Cohen, Saroff's second-cousin.

What happens now, says Bailey, is those prior creditors will be given notice by the court, and a meeting with all past and present creditors will take place, probably within the next 30 days, under the auspices of a court-appointed trustee. Attorney John Newton Jr. is the appointed trustee; he did not return several Metro Pulse calls for comment.

Newton will have the task of sorting through all of the various claimants' petitions and considering the validity of each, dispatching secured loans with collateral where possible.

Complicating it all are at least two pending Saroff lawsuits, one against an insurance company that had provided coverage on his buildings, and the other against Knoxville's Community Development Corporation, whom he has accused of hampering his ability to sell the warehouse properties through its threats of condemnation.

KCDC had indicated for some years that it might invoke eminent domain in order to bring in another, more capable developer to rehab the McClung properties. But when a 2009 appraisal (of about $5 million) came in at roughly twice what the agency had been prepared to shell out for the lots, KCDC dropped the condemnation tack in favor of gentler means of encouraging Saroff's redevelopment efforts (such as they were).

That KCDC backed off condemnation probably doesn't bode well for Saroff's creditors, either. KCDC chief Alvin Nance draws a comparison to the current housing market. "There are plenty of million-dollar homes out there on the market right now," he says. "Yeah, they're ‘worth' a million dollars. But nobody's buying them."

Newton was quoted by the News Sentinel as saying he had yet to determine whether the McClung properties could even be sold, given that some creditors hold liens against them, and given that he didn't know all the facts of the case.

All of which still leaves Knoxvillians who care about rehabilitating one of the city's longest-standing eyesores in a familiar holding pattern: waiting to see whether the properties can be released and resold to a capable new private developer. And some wonder whether the properties still hold the promise they once held, given the ravages of '07 fire and costs of acquisition and development.

Nance believes so, as long as the court can find its way through the legal barbed wire that currently separates the McClung properties from potential redevelopment. "I think something along the lines of what has been discussed for those properties all along—some kind of mixed-used development, going along with the Jackson Depot Redevelopment Plan—I think that's still a good idea," Nance says.

Local developer David Dewhirst, who saw a brief partnership with Saroff end abruptly several years ago, says he, too, believes the buildings can still be feasibly redeveloped according to some sort of mixed-use plan, provided the city pays more attention to the long-neglected infrastructure along Jackson.

"I believe the remaining warehouse buildings are quite viable, good structures," Dewhirst says. "I'd like to see them transformed. We need the momentum down there. But before a lot can happen, the infrastructure has to be rebuilt. It's hard to see anyone spending millions until sidewalks are rebuilt, the streets are fixed, and there are adequate utilities. That needs to be done before or in conjunction with any redevelopment."