It has nothing to do with the clutch.

Saturday, I drained the transfer case and took it apart, and after pulling out the middle driven shaft, I found out that the chain was so loose that it was jumping teeth. This was the loud grinding sound. I was hearing because if it was jump and teeth when I was using a torque wrench to turn the transmission shaft, I can only imagine how many times it was jumping with the engine running.

I purchased a new chain and gasket. They should be here in the next few days.