My Husband and I moved In to a guest house on August 22nd a few days later we found out that we are living in a illegal guest house, It has no permits we only slept there for two nights and we wanted to move. We confronted our landlords and told them we wanted our deposit back and our rent they gave us our money back, Today I was served with papers they are suing me can they do that? I'm so confused

First, there is no such thing as an "illegal guest house". The property may or may not be an illegal rental.

What permits did they not have? What are they suing you for? What grounds are they giving for the suit? ANY question on law needs to include your general locale as laws vary by area.

Do you have proof they returned what you paid?

First, how did you determine this was an illegal guest house? How do you know the permits were not pulled? How big is this guest house on their property?

OP said Santa Monica, Ca in her location.