Here are two test files, so we can see whether it's using non-breaking spaces for indentation that causes the problem. Look at the three final stories in the book to find dialogue with quotes.
"test_space.prc" uses non-breaking spaces for identation.
"test_indent.prc" is the same book using "real" indents.
Does the Calibre "smart quote" feature break for either or both of these?
Currently proofreading The Poison Belt, by Sir Arthur Conan Doyle.