Your guess of the result is wrong (I will explain why), I have carefully read the whole package, and believe the actually result should read:
in reply to logic for smart quotes - what does this code mean?
stuff ``passage one'' more stuff ``passage two'' stuff
Some more detailed explanation:
$quote is just the reference to an internal flag $ptQuote, which is used GLOBALLY to store the quotes conversion status.
For example, if you have this piece of two-line text in your pod:
Although they will be processed as two separate lines, but as the quote status is rememebred globally, those two lines would be converted correctly to:
The reason you had the wrong guess, is that you didn't realize $ptQuote is initially set to 0, so the first time you execute that piece of code you showed, the if condition is not satisfied, thus the if block is not executed.