TRENTON - Two brothers being sued by Atlantic City over a failed loan program have filed a counterclaim, saying the city created the problem when it reneged on its deal to fund the economic-stimulus program.

The struggling resort town is trying to recover $3 million from the program, which was intended to lend as much as $40 million to struggling homeowners and businesses.

No loans were made, and a legal battle over the city's initial investment has been continuing for more than a year and a half.

Gary and Michael Lax said the city is at fault because it demanded that the money used to seed the loan fund be returned before the end of a five-year agreement. Their lawyer said that money was spent to set up the loan fund "in anticipation of receiving the loan funds and lending the funds to qualified individuals."

Their counterclaim, filed last week, demands judgment against the city, damages, and legal costs.

In September, the Lax brothers and a Tennessee financial firm with which they were associated were added to the city's lawsuit over the loan program.

The city had sued W. Wesley Drummon and his ZeMurray Street Capital in August 2014, saying he failed to deliver promised services and didn't honor requests to return the money.

The company used most of the city money to buy TN Bidco, which later had management of more than $6.6 million in government-backed loans taken away by the Small Business Administration, an Associated Press review found. Drummon has denied the city's claims and said the city's lawyers reviewed the deal.

Michael Lax, of Spring Hill, Tenn., was listed in documents as the registered agent for TN Bidco after the purchase and was later paid $4,000 a month as a consultant. Gary Lax, a finance attorney in Washington, D.C., became chairman of the board of TN Bidco, according to company documents. He was also the trustee of a family trust with an ownership stake in ZeMurray. Their brother Eddie served as an aide and spokesman for former Atlantic City Mayor Lorenzo Langford, whose administration launched the program.

The Lax brothers and their attorney did not respond to requests for comment.

The $3 million is a blip in Atlantic City's financial struggles, but the money and the legal expenses associated with the case are an added burden as the city faces potential bankruptcy.

Last week Gov. Christie, Atlnatic City Mayor Don Guardian and state Senate President Steve Sweeney backed a plan to have the state take over most of the city's decision-making power, including its finances and the right to sell city assets and land.

An outside attorney for Atlantic City referred requests for comment to city officials, who did not respond to phone messages or emails.

As the city has battled in federal court to get back the money it says it is owed, it has also been fighting for information in the case.

After first going to court to wrangle records from Drummon, the city also sought a court order to require Drummon to testify at a deposition scheduled for next month. He previously refused to answer any questions, citing his Fifth Amendment right against self-incrimination.

Felix Gonzalez, Drummon's attorney, said in a previous filing that he had advised his client to plead the fifth after hearing that the U.S. attorney's office has launched a criminal investigation. A spokesman for the U.S. attorney's office said it does not confirm or deny the existence of investigations.

Gonzalez declined to comment this week.