This is one of those stories where there's a trial, and most of the plot is told in flashback as Holmes or Watson give testimony. But the trial ends partway through the episode and the resolution proceeds normally. I'm not going to try to replicate that in this recaplet, although you're free to read the paragraphs in a random order if you want to full experience.
The mystery plot starts with a delusional young man with a shotgun who thinks he's a medieval knight who killed his queen. And the lady who was his ex-girlfriend is, in fact, dead with a shotgun blast in her chest. But Holmes doesn't think he did it. In fact, he and Watson establish that she was killed with potassium chloride poisoning prior to her heart being destroyed with the shotgun, because the doctor who was treating her cancer wanted to hide the fact that an experimental drug enlarged her heart.
More importantly, the course of the investigation leads Holmes to harass a guy named James Dylan at work. Holmes finds his work (selling viatical settlements) repulsive, so he's maybe a little loud when he busts the guy for being a convicted felon who's violated his parole by going to a bar. And after the murderer has been put away, James Dylan takes a shot at Holmes, but Bell jumps in the way. He doesn't get killed, but he ends up with an uncontrollable trembling in his right hand.
That's what sets up the trial, because it seems that Holmes broke the law in the course of harassing James Dylan. And now people are questioning whether they really want consulting detectives around the place if they'll just get police officers shot. The result of the trial is a recommendation to fire Holmes and Watson, but the police commissioner talks to Bell about it. And it looks like Bell thinks they should keep them around, although he doesn't want Holmes anywhere near him
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Gregson opens the episode with word about the mayor's reelection campaign, but a crazy person wanders in. He babbles about how he killed the queen, and he turns out to have a shotgun. So his rambling about being "the night" suddenly seems much more important. Holmes is in the next room, and a whispered conversation with Gregson results in him being given permission to do...something. Holmes walks in and starts talking to the crazy person about the scarf on his wrist, but he breaks into a coughing fit. And the coughing fit cuts to Holmes as a witness in a trial, also coughing. He starts to resume, but the lawyer questioning him wants to hear about the James Dylan case, not the Rada Hollingsworth murder. Holmes, of course, thinks the two cases are inextricable, and he will not be bullied into explaining only one thing when he could explain two.
So, back to the police station. The scarf came from the crazy person's "queen," and Holmes utilizes his obsession with the Knight's Code to sneak close enough to let the police tackle him. The scarf would have been a token from his lady. Watson asks where the woman might be, and Gregson praises Holmes effusively. But in the courtroom, the judge requests that Holmes confine himself to things that actually happened, rather than making up things he wishes Gregson had said. Holmes suggests that the trial is only an administrative hearing, and that the judge is not, in all respects, a "real judge," which is obviously going to cause trouble. The judge says they're here because Holmes screwed up, and he's here to determine if he and Watson may continue their relationship with the city. Thanks for the exposition, your honor!
The lawyer (Ms. Walker) says they're here because of a breach of protocol. Holmes says the breach is only alleged, and he will not admit that he regularly breaks the law in the course of his activities. However, he runs down a list of habits Miss Walker has that suggest she's very regular in her habits, and asks if she's never crossed against the light to keep a schedule. She's thrown a bit, but she tries to draw a distinction between casual lawbreaking and the kind that really counts. The judge reminds him that an officer is in the hospital, so Holmes denies regular lawbreaking. Ms. Walker lists a number of times that he's obviously broken into private buildings, but he says most of those times involved doors that were surprisingly open. Sometimes they thought they heard a cry for help, but it was only a television or a small puppy. Holmes is not concerned about Watson being asked.