[BUG] autoMemoryDirectory in settings.local.json is ignored - system prompt still hardcodes global memory path

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

Bug Description

When autoMemoryDirectory is set in .claude/settings.local.json, Claude Code does not respect it.
The system prompt injected into the model still hardcodes the global memory path
(~/.claude/projects/<encoded-path>/memory/) instead of using the configured local path.

The system prompt hardcodes the global path. The local memory is never loaded at conversation start.

What Should Happen?

The model should use .claude/memory/ as the memory directory, as specified in autoMemoryDirectory.

Error Messages/Logs

Steps to Reproduce

1. Create .claude/settings.local.json with:

{
"autoMemoryDirectory": ".claude/memory"
}

1. Create .claude/memory/MEMORY.md with some content
2. Start a new Claude Code session
3. Observe that the model reads/writes from the global path, not .claude/memory

Claude Model

None

Is this a regression?

No, this never worked

Last Working Version

_No response_

Claude Code Version

Claude Code v2.1.112

Platform

Anthropic API

Operating System

Windows

Terminal/Shell

Windows Terminal

Additional Information

_No response_