[BUG] CLAUDE.local.md overrides ignored by harness

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?

CLAUDE.local.md files are not being recognized or prioritized by the Claude Code harness. When both CLAUDE.md and CLAUDE.local.md exist in the same directory, the harness loads CLAUDE.md and ignores CLAUDE.local.md, treating it as if the local override file doesn't exist.

What Should Happen?

CLAUDE.local.md should take precedence over CLAUDE.md in the same directory. Local configuration files (*.local.md) are conventionally meant to override base configuration, so all harness tools and skills (/memory, system context, etc.) should check for and prioritize .local.md variants.

Error Messages/Logs

Steps to Reproduce

Steps to reproduce:

1. Create a .claude/CLAUDE.md file with content (e.g., setting: value1)
2. Create a .claude/CLAUDE.local.md file with an override (e.g., setting: value2)
3. Run /memory command or check system context
4. Expected: System loads CLAUDE.local.md content (value2)
5. Actual: System loads CLAUDE.md content (value1)

Example from testing:

• CLAUDE.md contains: "the color of dice is blue"
• CLAUDE.local.md contains: "the color of dice is red"
• Result: System references "blue" instead of "red"

Claude Model

Not sure / Multiple models

Is this a regression?

I don't know

Last Working Version

_No response_

Claude Code Version

2.1.170

Platform

Anthropic API

Operating System

Windows

Terminal/Shell

PowerShell

Additional Information

_No response_