Well, as far as mine goes I believe it’s just a single encounter with the paladin that has the ability to spin wildly out of hand depending on how the PCs handle the situation. For example, If they act quickly it should be possible to talk him down without a fight at all… assuming the players remain tactful. Or it could turn into a melee involving the paladin, a handfull of cityfolk, 3 squads of guards, and two of the local merchants. Or they could start a fight with the tiefling next door, potentially missing the paladin’s action entirely and ending up the new top suspects themselves.
Regardless of what happens it should still be just one encounter.
