It was expounded in the Phantom City chapter that "there was a Buddha, most honoured ot two-legged beings."

  1. It was expounded in the Phantom City chapter that "there was a Buddha, most honoured ot two-legged beings."

  2. It was expounded in the Phantom City chapter, "there was a Buddha, most honoured ot two-legged beings."

Which is the correct sentence?

Thanks.

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Both are correct. “That” can be used with both direct and indirect quotes. Here is a website giving several examples: APA Style 6th Edition Blog: How to Cite Direct Quotations

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