Don't think the second train saw a green signal. They were in the middle of the block, while the first train was waiting just before the exit of the block (with a green signal ahead).
What I'm gathering from other sources is that the Spanish system allows the controller to override the point-based rules and provide manual clearance (because the blocks are long and it takes forever to reach the next signal by sight). It's a failure of the system imo. Ideally, the system, under no conditions whatsoever, should have even allowed such a practice to be allowed.
If the first train was really just before the exit of a block, then it's pretty safe to assume that the second train saw the corresponding distant signal.
> the Spanish system allows the controller to override the point-based rules
Every system allows that, it is required in order to be able to operate a railway network.
> What I'm gathering from other sources is that the Spanish system allows the controller to override the point-based rules and provide manual clearance
What actual happened is my speculation, the explanation how LZB works is not. It can be the case, that they messed up while issuing manual movement authorities, but if they did not notice that they need to switch to manual operation, they will have caused a crash.
Or by putting all the signals to red after the derailment of the first train so as to stop all the circulation on the line, which seems not to be the common practice in Spain unfortunately.
> then when LZB goes down it has to slow down/wait/follow some different protocol
The trains did stop when the LZB reported an error, like they should.
> follow some different protocol
That is manual operation, which I suspect they failed to do.