Legal Question in Real Estate Law in California

Yes, it's "legal." The rules about who may buy at a short sale are not laws; they are policies made up and enforced by the lenders. You should probably let the bank know that you and the seller are previously acquainted, but you are not relatives by blood or by marriage at present.

Mr. Whipple is right. I would add that the lender will not approve a short sale unless you have vigorously marketed the property and are getting the best price the market will bear for the property. If your girlfriend happens to be the buyer who comes up with the best offer, the bank is highly unlikely to care she is your girlfriend. They will, however, scrutinize the marketing much more on that basis. So you better have a completely independent top-notch agent that the bank will trust to have gotten the best possible price, or the bank will not approve the short sale.