How should we proceed?

We have been working as a sub-subcontractor with a construction company since last November. We had not done any commercial work prior to starting work here, but the person in charge of the projects assured us it was similar to the residential work we were used to, and they would answer all questions along the way. In March of this year, we still had crews working on the first project. The subcontractor was getting near their deadline due to delays in material or errors on what they ordered. As the deadline approached, we still had to install insulation on several pipes. The material they ordered was incorrect, so the crews let our supervisors know. The supervisors let the person in charge of the project, Mike, know. He said they could not afford to go over their deadline, so to proceed with installing the insulation that had been provided. Since it was incorrect, it did not fit. Our supervisors let Mike know we could not proceed, because it would not fit. He asked us to send crew members to pick up metal bars to push the pipes aside and install the insulation that was provided anyway. Our supervisors told him if we had to go through all of that it was clearly not going to end well. Mike said to proceed anyway and if anything happened it would be his responsibility. The crews completed the work, and when inspections came, they failed. Mike’s business partner wanted us to pay half the cost of what they had to pay someone else to fix it, but we said no since we had been telling them it was wrong. We continued to work with them on other projects. As of two weeks ago, they had not paid us for any of the work we had completed since March. We went to an attorney in Texas and explained the situation. He sent a letter requesting payment and explaining we would be willing to go to court if we did not receive payment. They sent a letter back saying they would not pay because of the insulation that was wrong. Since our relationship has been with Mike over the past months, he told us they will also sue us for half of what they had to pay the company to correct the insulation. He does agree that the insulation was his mistake and we should not be responsible, but his business partner is the one that does not agree.