Being sued for security deposit

[Tamir Alush]

I bought a small multi-family about a year ago and inherited a terrible section 8 tenant who constantly complained to Housing dept. about every little thing and made my life hell... Her lease wasn't extended and she vacated the apartment. Upon inspection, I found several issues which didn't allow me to give the security deposit back (after all she lived there for several years with children). 

I wasn't aware of the statutes that set the proper way I'm supposed to notify tenants of withholding security deposits, so I just let her know that I'm going to use these funds towards renovation of the unit via text message, and after the 30-day period allowed by law.

A few months went by, and she now hired an attorney and is suing me at small claims court for the security deposit. Naturally I'm more than willing to pay the security deposit back just to get past this and move on with my life, as this is not really worth fighting over, however the attorney is asking $1,500 in legal fees so the total amount they're willing to settle without going to court is just below $3,000. I've tried negotiating this figure down with no success. I've made three offered and they didn't even counter -- just rejected them. Per my understanding, they're well aware of the technicality for not notifying tenant on time and are basically "playing their position" and taking an aggressive position.

What would you do in such a case? I've heard that small claim courts always try to push for mediation before going before a judge, which is something I can use to my advantage, because they haven't budged at all in negotiations, however it is my understanding that the requested $1,500 in legal fees might go up if we don't settle prior to.

One more thing that is noteworthy is that they sued the management company (which I own) and not me directly (the property is under my name) and if this continues to trial they will need to re-submit the lawsuit. Perhaps this is something I can play to my advantage.