[Jack Simth]

... and then later, a Paladin (Sir Evilbane of Goodton) comes across the situation, and becomes fully briefed on it. The spirit inhabiting the undead asks for blessed release; by his Code, the Paladin can't not choose.

DM type 1 decides that if he destroys the undead, releasing it's trapped soul from continual torment to it's just reward, then the orphanage no longer has a food supply, so the orphans starve (the orphanage isn't very strong - can't hold on to valuable items such as a Sustaining Spoon, or a big wad of gold, to support the orphanage after the Paladin leaves). Paladin committed an evil act, and falls. The correct action would be to let the situation lie.

DM type 2 decides that if he does not destroy the undead, then he's knowingly and willfully permitting a continuing evil (the continued torture of an innocent), and falls (the orphanage isn't very strong - can't hold on to valuable items such as a Sustaining Spoon, or a big wad of gold, to support the orphanage after the Paladin leaves). The correct action would be to destroy the undead.

DM type 1 is a reasonable person - he's made a judgment call on which is the worse.
DM type 2 is a reasonable person - he's made a judgment call on which is the worse.

Unless the DM flat out tells the player he's a type 1 or type 2 DM (or 3 or 4 - get to that later; whether that's by an Augury, a Phylactery of Faithfulness, or OOC talking), the Paladin has basically a 50/50 chance of falling (unless he's a mind-reader) given a type 1 or 2 DM.

Now, a DM type 3 (me, when I was DMing) recognizes the dilemma, and will maintain the Paladin's standing no matter which way he chooses (possibly provided the paladin clearly thinks about the situation).

DM type 4 (the child of an unmarried rodent) grins evilly and causes the Paladin to fall no matter what he does.

Type 4 DM is unreasonable; types 1-3 are reasonably reasonable individuals. Unless Paladin knows, in advance, which type of DM he's dealing with, he's got a 50/50 chance of simply falling.

Alignment debates primarily spring from where the gray areas (specific actions) run across absolutes (such as the Paladin's Code).