HELP! A contractor is try holding me hostage!

[Matt Speer]

I'll make a long story as short as possible. 

• Just as I thought our refi was complete - we realized we had to pay off a lien to our contractor for $4,000 that we owed him from the original rehab. It was interest free money and at the time, made 100% sense for us to take. 
• Now he's just being sketchy - we realized after the fact that we shouldn't have agreed to the terms of the lien. If we're just one day late he could try to seize our property appraised at $167K over just a few thousand dollars. 
• He's trying to say we owe him an additional $1K, even through we have record that it's absolutely false. He has a sleazy lawyer that is dragging his feet even after we proved we paid the full amount - we think he dragged his feet thinking we'd forget to make the 8/31 payment today.. didn't happen. 
• At the end of the day, we can deal with this issue and get it resolved, but it's keeping us from closing on the refi that will put $125K+ back in our pockets so we can roll it into the next deal(s). 

What should we do?? 

Part of me wants to just let it work itself out because we're clearly in the right. The other part of me wants to find a lawyer to put a scare into them for trying to push us around. 

Any help would be highly appreciated and if you're a lawyer that wants to make a quick $100 to send them some sort of legal magic, please help!! 

[Matt Speer]

It's not worth losing the deal over $1,000.. we have over $100K invested in the property. At the same time, why pay someone $1,000 that we don't owe just because they're sleazy scumbags? 

Clearly I'm pretty frustrated at this point, but I appreciate your comment nonetheless.