We moved into a rural property in Dec 2010 at which time we did receive a home inspection, specifically asking that the well, septic and a high deck be addressed as we had never lived in the country before. In April 2011 the alarm on our 'septic' went off, we had the tank emptied and were told there may be some issues. We contacted our municipality to find out who installed the system (only 3 years old) hoping for some warranty. They told us that we didn't have a septic, we have a holding tank. So it seems that the previous owner who had the house built had a permit issued for, installed and got the okay on a holding tank. Then after the fact, altered the tank to add a concrete outlet pipe into a makeshift septic. Fill was then brought into the property to cover it all up. Not only have we had great difficulty and several thousands of dollars worth of investigating a system that will work, we now have our neighbour who's own well/septic do not meet code but we will have to purchase a new well for him in a different location so that we can proceed with the installation of our septic. We have begun to work with a lawyer but would love to know your thoughts.

It looks like you are on the right track, getting an attorney to sue about sewage.

By-the-way, "septic" isn't a noun, it's an adjective, which usually in this context modifies "tank". Thus it would be a "septic tank (http://en.wikipedia.org/wiki/Septic_tank)". You say you were told that you "didn't have a septic, [you] have a holding tank". The two terms would mean the same thing. The "makeshift septic" to which it connected would probably be some sort of a leach system or "septic drain field (http://en.wikipedia.org/wiki/Septic_drain_field)".

Be sure to sue the home inspector as well.

Most home inspectors have waivers of liability that are signed, you can look into that. And short of opening up a system, it is not possible to fully inspect a septic tank.

If the previous owner did the conversion and did not get a septic tank permit, and knew this and did not tell you this. Then normally they will be liable, unless this was a foreclosure sale, in which case the bank has no knowledge of these things.