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Jesse James, Janine Lindemulder

JCLA/GSI Media

Jesse James says his daughter Sunny is doing great, except when it comes to her relationship with her mother.

"She's thriving, doing well in school, she has an amazing relationship with her brother and sister and Sandy," James testified Wednesday in Orange County Family Court on the third day of a hearing that will determine whether James can move his 6-year-old to Texas and what that means for Sunny's mom, Janine Lindemulder. (We wonder what it means for Sandra Bullock, but that's another story.)

"We're getting to a point where we can live in peace," James said. "[Moving] will only make things better."

And not just for him, he says.

"I think she has yet to hit rock bottom and I fear [when she does] it will involve Sunny," James said of Lindemulder, who he claims is unstable and battling an addiction to prescription drugs.

He said that, since Lindemulder was released June 3 from a halfway house, where she served time for probation violation, Sunny "acts out, she's more agitated, she has sleeping problems. The more contact she has with her mom, the more fear she has to sleep in her own room."

And moving to Austin, where he recently purchased a nine-bedroom home that's 17 miles away from Bullock's house, will provide a respite from all the media attention and allow Sunny to remain close to her former step-mom.

Lindemulder's attorney, Richard Masson, told E! News, meanwhile, that James is in violation of a two-year-old custody agreement, in which they were to resume sharing 50-50 custody of Sunny once Lindemulder was released.

"Janine would consider moving to Texas to be with her daughter, but she is definitely concerned about it, considering the problems she has dealt with in regards to custody here in California," Masson said.

Lindemulder testified yesterday that James has let her have only eight out of a scheduled 15 visits with Sunny since her release and that she felt she was "trying to be replaced by Sandra Bullock."

She said that she's open to counseling and wants to improve her relationship with James.

"Janine is concerned that if Sunny is faced with the choice of hanging out with Sandra Bullock [and] Louis at Mr. James' mansion, or spending time with her mother in a less impressive environment, she may be left out," Masson said. "She doesn't have family, friends or a job in Austin. It's something she is considering, but it is not an ideal situation."

Court Commissioner Thomas Schulte is expected to rule Friday on which arrangement is most suitable. He is considering whether to allow James to move to Austin with Sunny, make James leave Sunny with Lindemulder in California, or have Lindemulder move to Texas, as well.

"Jesse's moving either way, and ideally Sunny is going with him," James' attorney, John Schilling, told People.

—Additional reporting by Claudia Rosenbaum