Wiseblood
Adventurer
As Oofta noted, it is not at all clear there was a Good option available. This doesn't seem to have been a case of, "There is a Good option, but I don't want to pay the cost." Dying for a man that he cannot save does not reduce the pain and suffering in the world. It makes no life in the world better - so it isn't itself a good act. Barring raise dead, doing so severely limits the Good the paladin can do in the future.
What we are really talking about is the paladin following an expected behavior pattern, aka acting like an honorable knight. Honor and rules aren't about Good. They are about Law. I will accept that the Paladin may not have done what folks would expect from an honorable knight.
So, in traditional terms, the GM pitted the Law against Good. It was the Law that he should fight a fight he could not win. But surviving serves the Good afterwards. From this perspective, this is Kobyashi Maru - a challenge the Paladin cannot win.
I think you are using the word Good when you mean desirable. Conflating outcome with outlook.