Question

A dispute over a contract between two people in the same city would most likely be heard first in?

Answer 1

A state trial court.

Answer 2

I believe the answer is:  state trial court

A state trial court can hear all the cases that occurs within the jurisdiction of the states (even in different cities, as long as they are located within the same state borders). Exception might occurs if the higher level state directly asked to hand over the case. In that case, the state trial court would be forced to oblige.