Being Sued over settlement on a foreclosed house

In 2006 we had a house built, a few months into it we found out we had a bad contractor when he wouldn’t produce material releases. We went to the Material provider and they refused to show us the account or give us releases for what we paid the contractor for. This went on from May to December of 2006. We had gotten a lawyer in Nov 06 and the provider and the contractor still refused to give us releases. In August 06 I gave verbal instruction to the provider not to give the contractor anymore material on our account. I did this verbally because I had no evidence to legally put a stop notice on the contractor. In Jan 07 the Provider finally opened the contractors account to us and it was a mess. Turns out several delivery addresses where wrong, other peoples materials where being dropped at my property and I was lien'd for $53,000 (the total amount of the contractors account). By my own accounts I could only cover $29,000 in material that went into the house. At the end of 2 years in 2009 a settlement was agreed upon with a Deed of trust, Then California decided to furlough me 3 days a month reducing my paycheck by $1200.00. I could no long afford the house.

Two months after the settlement we went to a bankruptcy lawyer to file and he reviewed our settlement and told us / showed us where we couldn’t file bankruptcy on the settlement. This is exactly opposite of what we instructed our lawyer to do and he didn’t inform us of this fact before signing the settlement. We had informed him to make sure it would be done with if we had to file bankruptcy, because at the time we didn’t know how many furlough days California would be docking my pay check.

I ended giving my house back to Cal-Vet in Feb 2010. In April 2010 Cal-Vet gave the Material Provider the opportunity to foreclose on the house and they did not take action. In Jun 2010 they filed documents to sue me for $33,000. We still have a lawyer, but we where severed directly from the providers lawyer Dec 2010.

BTW I still have all the paperwork / invoices / photos / video on this. I live in a small town and no one seems to care that the contractor took $106,000 dollars from us and never paid the bills. No one cares that the provider refused to show us our joint account with the contractor so we could see what was going on. No one cares that the contractor did make a huge payment to the provider after I paid him (according to his account records), but the money was applied to his account that had been delinquent for nearly a year instead of my account.

Can they still sue me for the funds even though the security on their loan was the house and they took no action to foreclose when given the opportunity? Do I have any recourse from the provider withholding access to the account from me?