Was a cruiser man for many years, water getting into the wheel bearing seals and into the diff housing is a cruiser thing. It gets worse as they age due to wear, were the seals sit on surfaces. I feel under the circumstances Toyota are being very reasonable. That said not picking up on the front disks and pads is not very acceptable, use that to your benefit. The spongy break pedal feel would have been from the sideways movement of the front wheel pushing the pads apart on the side with the stuffed bearing
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