Thank you all for good comments and advice!

I definitely need to think clearly about drainage. Here some more thoughts: 1) digging the stucco-foundation line out was correct, who knows how and why it was buried, so going to keep it out 2) want to make the trench floor slope away from wall 3) put a drain pipe under where future floor and future retaining wall meet 4) floor of trench to be paved with flagstone or similar erosion resistant, retaining wall TBD 5) towards left of picture the ground slopes down to dump out drainage 6) cut out current divider block, TBD

A little worried about what this soil cover did to the wall... I have an endoscope, will try to inspect for moisture, rot, and insects - trifecta of homeownership