I answer with the disclaimer that I am a Massaxchusetts attorney, and that there may be particular provisions of local law rthat would change my responses.
The litigation may not have been pending in 2005 when you bought, and that could explain why it was not brought to your attention at that time. In any case, pending litigation is not, by itself, a so called "title issue" in that it does not directly affect ownership rights, even though, as a practical matter, it may effect market value, and the bad news is that it is not covered by your title insurance. The good news, and for the same reason that it is not a "title" issue, your buyers may not have had the right to back out of the deal even if their lender refused to go through with their loan. You should consult local counsel who can review your Purchase and Sale Agreement and determine whether you have any recourse against those buyers.