Teh bad faith penalties may be awarded by either court. If you pursue the action in Small Claims court, you can retain an attorney to assist you in preparing the case, and collect those attorneys fees. The attorney can't represent you at the Small Claims Court trial.
It looks like the landlord didn't follow on statute regarding your security deposit.
Most courts do not favor this. You have a good case to ask for twice your security deposit, plus attorney's fees and costs. You can recover this in any court, up to the jurisdiction of that court. In CA, the small claims limits against individuals was recently raised to $10,000. It is still $5,000 against corporations, etc.
Even though an attorney cannot represent you in small claims, most lease agreements provide for attorney's fees. I think $750 would be reasonable if that attorney substantially assists you in your case.
This is general legal advice intended for informational purposes only and does not create and attorney/client relationship. If you wish further advice, please contact an attorney of your own choosing or you may contact me for further advice and make other arrangements including retaining my services.