Based on what you've stated, it sounds as if the contractor may not be acting properly. (There may be other facts at issue that would change the response.)
If your contractor had a contract that was drafted in compliance with California law, it would have clearly stated on there that the downpayment may NOT exceed $1,000 or 10% of the contract price, whichever is LESS. By asking for more than $1,000, he may have already violated the law.
The contract should have also contained a provision that says the contractor cannot collect payment for work that is not completed, or for materials that have not been delivered. If the contractor was going to require progress payments, the contract should have specified what work would be completed, an estimate of when it should be completed, and how much should be paid at that time. It sounds like he is not following his own contract.
There are many remedies open to homeowners, particularly if the 'contractor' is not licensed.
The fact that you drafted the contract will probably help you. A contractor doing home improvement work is required to have a contract that complies with the home improvement contract laws. I suspect that the one you drafted does not. The terms of the contract will determine whether he is entitled to payment. You can agree to partial payments, but should not pay for work that has not been done.
Try to work something out with the contractor.
You will probably want to consult with a local attorney who can review your contract.
You might also be able to get some help from the CSLB.
It may seem like a simple issue to prepare the contract yourself, but in hindsight I think you can see that consultation with a construction attorney in California before starting your project could have helped. One thing we see all to often is that contractors who successfully induce the owner to pay ahead of what the contract provides for once will keep on asking.
A contractor who walks off with work pending cannot demand the unpaid balance for several reasons. First in your case it appears he/she was violating the payment schedule and demanding more to force you to pay more than required to keep the job going. As to the "prep work" claim, if this contractor refuses to finish the work, you will need to "cover" (find a substitute contractor) to finish the work. If you get a reasonable quote for the finish of the contract items, if you end up paying more you will be able to "offset" that against any monies owed. Generally, you make demand (in writing) for the completion of the work so the original contractor can "cure" (by finishing) and if not you need to "cover" as above. I am not sure if the contract contains an attorneys fees provision, but having one is often a deterrent for a contractor trying to "extort" payments, walk off the job or even threaten you with an unwarranted lien. Many experienced counsel will offer you a free consultation, to explore your options and see if outside help is appropriate for your situation. Hope that helps and good luck.