What happens if a sub-contractor claims they didn't recieve there 1099 and therefore didn't file it?

I'm currently getting audited by the state of MN and one of my old sub contractors is claiming they didn't receive their 1099 for 2007 and therefore they didn't file it. However, they did receive one for 2008 and did receive it then... they've talked to my auditor and now are threatening to sue me. Just wondering what could happen to me? Could they disallow this deduction?!