***HELP*** Fire in building, tenant filed suit for illegal eviction and security deposit question

[Clarence Johnson]

I May my one of my parents tenants in Compton, Ca caused a fire in one of their units which caused fire damage to their unit and water damage to the lower unit and adjacent unit.  The fire departments report determined that the fire was caused by the tenant throwing a cigarette into the trashcan, and also mentioned finding drugs on the premises.  The building is a LA Housing Authority Mod Rehab building (section 8 like program with weird rules, anyone familiar with this program please reach out) that they have owned for about 7 years.  

When my parents asked the Housing Authority about tenant relocation they knew very little about the program.  The Housing Authority and firre department declared the unit condemned due to the fire and smoke damage and the fact that the water, and gas were turned off.

Remediation and construction to repair damage were started immediately as my parents tried to decide if they would evict the tenant based on nuisance.  While construction was going on the tenant continued to access the property, use marijuana on the premises and get the way of construction workers.  Tenants were informed to call the owner if they needed to access the property doing construction so that they would not be injured in the condemned unit.  Tenants continued to access the property with no regard to instructions or their safety and on one occasion removed the entry door knob to install it on their bedroom door (breaking the door in the process).  For the safety of all parties and security of the construction site my father changed the entry knob and deadbolt and informed the tenant that if she gives 24hrs notice he can meet her to retrieve any belongings she may need.  

Without our knowledge Housing Authority canceled the tenants contract the week of the fire and sent notification of such to her.  Housing authority and the tenant both received notice from my parents to stop payment until the construction was complete.  Within 2 weeks of the locks being changed the tenant filed suit ($10,000) against my parents in small claims court claiming that she was illegally locked out of her home and denied access to her medicine which caused pain and suffering.  We did not receive notification of the housing authoruty canceling her contract until after we were be sued.  The tenant later made contact with my parents and moved her personal effects, refusing to sign a disclaimer stating that she is not being forced to move or being evicted by the owner.  At the time her home was a work site and we will be bringing pictures and documentation to court to support our case.

Does anyone have any suggestions in regards to how we should approach the case in court (7/28/15)?  Can we deduct the cost of the insurance deductible ($1,000) from the tenants security deposit?

Thanks In Advance for your answers and suggestions, and I hope I can add value to the board with by helping others with my areas of expertise (So Ca Single Family and Investment properties as well as real-estate contract law)