No sabía que estuvieras en esta ciudad.

Would the indicative (estabas) work here as well? I seem to recall similar cases where the indicative was used with “no sabía que”.

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It works, and I think here they have kind of the same meaning.

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My working theory is, in this example the subjunctive indicates that the speaker isn’t entirely sure or perhaps was surprised to learn the news and is expressing this disbelief / emotion as opposed to just stating a fact.