First you'll want to take out enough dirt to properly assess and repair the damage to the structure itself. How you finish the external protection depends on whether you want to:
- Remove the raised patio entirely and replace with stairs
[Fix house wrap and repair/replace any mangled siding if desired]
- Keep the patio and mitigate drainage issues
[Waterproof the buried area properly (all the way down to footings), and/or add a drainage system to carry water away from the structure]
The cantilever is fine, it was likely done to reduce the excavation and material of the foundation (basement?). Or, if you prefer to think of it more positively, to expand the size of the main floor beyond the foundation walls. The only problem is the fill against a non-waterproofed section of the house.
Even before reading the OP's comment, my impression from the pictures was that the porch area was added after the house was built. Note the siding trim ending at the sliding door; there were probably steps leading down from the doorway originally. Probably the masonry stoop shown on the plans, though since I don't see buried concrete stairs (people are lazy, why move/dispose) and the vapor barrier seems original, I'd bet it was only ever temporary wood steps for getting the initial CFO. Most likely scenario here is that a previous owner just put in the raised patio without a permit or city inspections.
As far as prospects for legal recourse (IANAL), in reverse chronological order:
- Your inspector (who btw typically has 0 liability no matter how badly they overlook something) could potentially have caught the discrepancy with the plans on file, but most don't look at plans that close (if at all), and they certainly wouldn't have dug up the patio to check.
- Previous owners weren't necessarily aware the damage (took you 3 years to find it) or that the porch wasn't original, so they wouldn't have known to disclose anything.
- Builder got sign-off from the city against the plans on file, so they have documentation they did the work properly at the time and didn't install the porch. BTW I believe that the builder could easily remember the general project details, even 12 years later; I can recall many aspects of houses I worked on 20 years ago.
Since you have no evidence of who put in the porch or when, or that the last owners had cause to know about the damage and disclose it, I doubt you could hold any of these parties responsible for repairs.