English Translation
I thought you were happy.
Should be “I thought you would be happy”.
I thought you were happy.
Should be “I thought you would be happy”.
I believe it’s Konjunktiv I, which is describing a hypothetical. So, the English translation uses “were” not in the past tense, but rather in the subjunctive, like “I would be happy if I were rich”.
It would be Konjunktiv II, but you are right – the ambiguity of the English “were” is what tripped me up here. Thanks!