What are the exceptions to the requirement to judge one another favorably? Does it apply unless the person has a (proven) reputation of a Rasha'? Is it limited to Bein Adam LaMakom? (If someone steals my wallet, do I have to assume he is poor and needs the money to feed his family?)

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    How can you say that this "proven rasha" hasn't made teshuva? Isn't that antithetical to this principle? – Charles Koppelman Oct 25 '12 at 16:34
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    @CharlesKoppelman It's only antithetical if the principle applies to that case. Your argument is circular. – Double AA Oct 25 '12 at 16:39
  • @DoubleAA Fair. I guess my argument is that it's pshita that you should judge others favorably because "am kodesh atah", but that you need the principle specifically in the case of a rasha (and moreso in the case of bein adam l'chavero than laMakom) – Charles Koppelman Oct 25 '12 at 16:45

Maimonides explains the scope rule in his commentary to Avot 1:6 as follows:

והוי דן את כל האדם לכף זכות - עניינו, שאם יהיה אדם שאינו ידוע לך, לא תדע האם צדיק הוא או רשע, ותראהו עושה מעשה או אומר דבר, שאם יפורש באופן מה הריהו טוב, ואם תפרשהו באופן אחר הרי הוא רע - פרשהו כטוב, ואל תחשוב בו רע. אבל אם היה איש ידוע שהוא צדיק, ומפורסם במעשי הטוב, ונראה לו מעשה שכל תכונותיו יורו על היותו מעשה רע, ואין להכריע בו שהוא מעשה טוב אלא בדוחק רב מאד ובאפשרות רחוקה - צריך לפרש אותו כטוב, הואיל ויש צד אפשרות להיותו טוב, ואין מותר לחושדו, ועל זה יאמרו: "כל החושד כשרים לוקה בגופו". וכן אם היה רשע ונתפרסמו מעשיו, ואחר כך ראינוהו עושה מעשה שראיותיו כולן מורות שהוא טוב, ובו צד אפשרות רחוקה מאד לרע - צריך להשמר ממנו, ולא להאמין בו טוב, הואיל ויש בו אפשרות לרע, אמר: +משלי כו, כה+ "כי יחנן קולו אל תאמן בו, כי שבע תועבות בליבו". ואם היה בלתי ידוע, והמעשה נוטה אל אחד משני הקצוות - צריך בדרך המעלה שידון לכף זכות, איזה משני הקצוות שתהיה.‏
And judge every man favorably -- it's meaning is, that if there is a man whom you don't know and you don't know if he is a Tzaddik or a Rasha, and you see him do an action or say a thing which if you explain it one way it is good but if you explain it another way it is bad, then explain it in the good way and don't think he is a Rasha. But, if you know the man is a Tzaddik and is known to do good things and you see him do an action which from all its aspects looks bad and only with a really forced and far-flung explanation does it look good, still you must explain it as good and it is forbidden to suspect him of evil, as it says (Yoma 19b) "Anyone who suspects a upright individual [of evil] should be bodily whipped." Similarly, if you know the man to be a Rasha and his [evil] actions are publicly known, and you see him do an action which from all its aspects looks good, and only with a really forced and far-flung explanation does it look bad, you must be careful of him and not assume [the action] was good... [Translation mine]

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According to Rebbe Nachman of Breslev, not only are there no exceptions but it's specifically in the case of a rasha where being dan lechaf zechus is essential:

"Know that you must judge all people favorably. This applies even to the worst of people. You must search until you find some little bit of good in them. In that good place inside them, they are not bad! If you can just find this little bit of good and judge them favorably, you really can elevate them and swing the scales of judgment in their favor. This way you can bring them back to God."

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