However, Deeds' press agent informs him that his fantasized angel is really a deceitful, Pulitzer-Prize winning reporter named Louise (Babe) Bennett - before she can tell him herself:

Mary Dawson my eye! That dame took you for a sleigh ride that New York will laugh about for years...She's the slickest, two-timing, double-crossing...She's the star reporter on the Mail! Every time you opened your kisser, you gave her another story. She's the dame who slapped that moniker on ya Cinderella Man! You've been making love to a double dose of cyanide.

He reacts to news of the treachery with a concerned and troubled grimace. Deeds doesn't allow her the chance to "explain" during an unfinished phone call. He moves to his window and stands there, feeling betrayed. His illusions about her are dashed, and he immediately prepares to pack his things.

In a jarring scene following the melodramatic revelation, he comes down his stairs and is confronted by an unemployed, outraged, hunger-crazed farmer (John Wray) ruined by the Depression who has broken into his mansion, denouncing him for irresponsibly feeding doughnuts to horses rather than to men: "Did you ever think of feeding doughnuts to human beings?" The accusatory man waves a gun and threatens to shoot, but then lowers it and apologizes for pointing it: "Excuse me." He has lost his farm after twenty years of work and seen his children and "game little wife" go hungry and stand in breadlines: "I'm at the end of my rope!"

Deeds feeds the man the elegant lunch prepared for Babe and encourages him with nods and face gestures, while watching him from across the table with chin in hand. At that point, his conscience is awakened and he decides to remain in New York to give away his fortune - the newly-acquired source of all his misfortune - to dispossessed, unemployed farmers. His encounter with the farmer has rejuvenated his populist ideals, and he determines to help underwrite rural, family homesteads within a huge farming district (divided into ten acre farms and fully equipped with seed, a horse and a cow) for as many needy, unemployed farmers as possible. If each of them works the land successfully for three years, then the farm becomes theirs.

The headlines announce: "DEEDS' PLAN STARTLES FINANCIAL WORLD! Magnitude of Deeds' Farming Project Shocks Financial Circles." "STAFF OF WORKERS INVESTIGATE APPLICANTS - Deeds' Home to be Headquarters for Filing Farm Project Applications." And "THOUSANDS OF UNEMPLOYED STORM DEEDS' HOME! Unemployed Submerge Deeds' Office Staff with Applications for Farm Donations." Tired and unshaven, Deeds joins his staff and personally takes hundreds of applicants for homesteads in the bulging foyer of his mansion - to help the ailing economy of the Depression. One of the poor ragged men, a Scandinavian petitioner named Christian Swenson (Christian Rub), from "South Dakota North," generously shares a simple sandwich with Deeds. Likewise, Deeds orders lunch for the hundreds waiting in line. One farmer (George "Gabby" Hayes), chosen as spokesman, is pushed forward to formally thank Deeds: "We think you're swell and that's no baloney....We're all down and out. A fellow like you comes along and it kind of gives us a little hope."

His pecuniary, scheming and crooked lawyer and the Semples, distant relatives, declare that Deeds is insane, afraid that they will lose a piece of the fortune. They file suit, under Cedar's representation, to contest the will and claim their right to his twenty-million dollars: "You say the word and we'll stop this yokel dead in his tracks." The grateful farm spokesman is pushed aside and Deeds is arrested with an "insanity warrant," due to a complaint from a relative of the late Martin Semple: "The charges are that Mr. Deeds is insane and incapable of handling the estate."

Deeds is confined and forced to undergo a lunacy hearing. Betrayed once more, he sits with a blank stare, silhouetted against the window of his sanitarium cell in the COUNTY HOSPITAL. Babe is desperate to speak to him in the asylum, but isn't allowed entrance. Cobb snarls at her in the hallway:

Haven't you done enough damage already?...You're wasting your time. He doesn't want any lawyers. He's sunk so low, he doesn't want help from anybody. You can take a bow for that. A swell a guy as ever hit this town and you crucified him for a couple of stinking headlines. You've done your bit. Now stay out of his way.

A climactic lunacy hearing is scheduled to be held in a packed courtroom, presided over by Judge May (H.B. Warner). The self-deprecating, silent defendant who has stopped talking has become catatonic and obstinately refuses to defend himself with counsel. Throngs of farmers are aroused at the efforts to balk their benefactor and attend in large numbers. Police surround the courthouse in anticipation of an outbreak.

Before witnesses appear, Cedar summarizes their testimony with instances of Deeds' "derangement" including playing the tuba, attacking eminent writers, feeding doughnuts to horses, riding fire engines, ejecting musical leaders from a reception in his home, and irresponsibly offering his money to finance failed farms. Cedar argues that Deeds is a radical danger and hallucinating "crackpot." As a "public benefactor," he encourages "an undercurrent of social unrest" that is "fomenting a disturbance from which the country may not soon recover."

A relentless number of authoritative witnesses, eight in total in a series of short vignettes, are presented by Cedar and paraded against Deeds - whose "incompetency and abnormality we shall prove beyond a reasonable doubt."

• When the newspaper articles are held up as evidence, Babe Bennett hysterically pleads to the judge: "The whole hearing's ridiculous. That man's no more insane than you are....It's obviously a frame-up. They're trying to railroad this man for the money they can get out of him...What kind of a hearing is this? What are you trying to do - persecute the man? He's not defending himself. Somebody's got to do it."
  
• Two nice elderly sisters brought there from his hometown, Jane and Amy Faulkner (Margaret Seddon and Margaret McWade), declare him crazy, or 'pixilated'. The seemingly-innocent, old-maid ladies are damaging to his case, saying that - "the pixies had got him."
  
• The policeman who had witnessed Deeds' late-night "Back to Nature" episode testifies: "I never thought he was cracked."
  
• The waiter (Gene Morgan) at Tullio's testifies: "I never figured he was the guy that was looking for trouble."
  
• Madame Pomponi delivers a short, emphatic, operatic argument: "He threw us out bodily, but bodily."
  
• One of the bodyguards (Warren Hymer) that was locked in the closet argues: "Let's quit this guy. He's nuts."
  
• The Irish pushcart owner of the horse that ate doughnuts complains: "Clara won't eat nothin' but doughnuts, now."
  
• Psychiatrist Emile Von Haller (Wyrley Birch), a Freud look-alike with Viennese accent, presents an expert, psycho-analytic analysis of Deeds' behavior, with charts illustrating up-and-down mood swings of manic-depression

After the extensive testimony, the judge recommends committing Deeds, for his own safety, in an institution as prescribed by law: "You need medical attention, Mr. Deeds." Babe bursts forward and persuasively begs him to fight the charges: "You've got to make him talk." After a major display of public contrition, she passionately asks to be allowed to take the stand a second time. She points out that every time he opened his mouth to defend his actions and sanity, he implicated himself and was hurt. She anguishes over her part in helping him into the nut house: "He's been the victim of every conniving crook in town." She asks rhetorically: "Why shouldn't he keep quiet? Every time he said anything, it was twisted around to sound imbecilic. He can thank me for it. I handed the gang a grand laugh. It's a fitting climax to my sense of humor." She publicly confesses her love to him and testifies on his behalf: "He could never fit in with our distorted viewpoint, because he's honest and sincere and good. If that man's crazy, your Honor, the rest of us belong in strait-jackets."

MacWade, Cobb, and the throng of disenfranchised farmers in the audience stand supportively behind him. With their support, Deeds decides to rise, "I'd like to get in my two-cents worth," and defends his generous philanthropy in court in the film's exciting conclusion. With a sophisticated, masterful display of verbal ingenuity, he systematically, point-for-point demonstrates that every piece of legal testimony can be proven false - and that everyone else is just as idiotic, crazy, expressive or eccentric in their actions as he is. First, he debunks the charges against his tuba-playing: "I don't see any harm in it. I play mine whenever I want to concentrate." He compares his tuba-playing to the judge's unconscious "o filling": "The judge here is an o-filler... You fill in all the spaces with your pencil. I was watching him. That may make you look a little crazy, your Honor, just sitting around and filling in O's, but I don't see anything wrong 'cause that helps you think. Other people are doodlers." He points out Dr. Von Haller's "doodling" on paper - a mannerism that helps him think: "This is a piece of paper he was scribbling on...Exhibit A for the defense. It looks kind of stupid, doesn't it, your Honor? But I guess that's alright if Dr. Von Haller has to doodle to help him think, that's his business." He also describes his uncle's nose-twitching and his aunt's knuckle-cracking as other examples: "So you see, everybody does silly things to help them think. Well, I play the tuba."

Deeds defends his doughnut-feeding to horses on account of his drunkenness, a common condition: "It was the first time I was ever drunk in my life...It's likely to happen to anybody..." The two Faulkners are unmasked as self-centered and frivolous, and neutralized when under questioning, they admit:

Why, everybody in Mandrake Falls is pixilated - except us.

He also defends the "rather fantastic" charge - giving away his entire fortune. After discovering that "all that money" only brought ill-luck: "You'd feel that you had a hot potato in your hand and you'd want to drop it." Cedar stands, raving that Deeds' give-away plan would produce "repercussions...that would rock the foundation of our entire governmental system." Deeds argues for noblesse oblige - those who have money should help those who don't:

From what I can see, no matter what system of government we have, there will always be leaders and always be followers. It's like the road out in front of my house. It's on a steep hill. Every day I watch the cars climbing up. Some go lickety-split up that hill on high, some have to shift into second, and some sputter and shake and slip back to the bottom again. Same cars, same gasoline, yet some make it and some don't. And I say the fellas who can make the hill on high should stop once in a while and help those who can't. That's all I'm trying to do with this money. Help the fellas who can't make the hill on high.

To illustrate that the farmers have greater needs in society, he compares himself to a Good Samaritan - a man in a boat who has to decide whether to save the drowning (farmers) or aid those who are simply tired of rowing (his Semple cousins and Cedar the lawyer):

It's like I'm out in a big boat, and I see one fellow in a rowboat who's tired of rowing and wants a free ride, and another fellow who's drowning. Who would you expect me to rescue? Mr. Cedar - who's just tired of rowing and wants a free ride? Or those men out there who are drowning? Any ten year old child will give you the answer to that.

And Deeds divulges that Cedar bargained with him for a settlement before the hearing in exchange for calling "the whole thing off": "He wouldn't think I was crazy if he [Cedar] got paid off." When "there's just one more thing I'd like to get off my chest," Deeds conclusively punches Cedar in the jaw, arousing cheers from the farmers.

Following the testimony, the judge rules on his sanity with an optimistic outcome:

Mr. Deeds, there has been a great deal of damaging testimony against you. Your behavior, to say the least, has been most strange. But, in the opinion of the court, you are not only sane but you're the sanest man that's ever walked into this courtroom. Case dismissed.

Triumphant in his defense over greed, the crowd carries him out on their shoulders. Babe is pushed aside in the confusion, and sniffles to herself in the almost-empty courtroom. Deeds returns there (with ripped clothing) and sweeps Babe into his arms, while the Faulkner sisters proclaim him to be "still pixilated" before the film's fade-out. Babe peppers her lover's face with kisses. With tightly-closed lips, Deeds kisses her back amidst cheers and "For He's a Jolly Good Fellow."