On IPN, no email receipts are sent for contributions

Related to: http://issues.civicrm.org/jira/browse/CRM-8057

We have a contribution page where users use Paypal or Google Checkout. After the IPN is received from the payment processor, the contribution status and receipt date is updated but no receipt is sent.

Debugging:

• Checked mail logs to make sure that no email is sent
• Receipt sending works fine when done manually
• Contribution form is DEFINITELY set to send receipts. I even checked the contribution_page table and is_email_receipt is 1.
• The CiviCRM log says "Contribution record updated successfully" but not "Success: Database updated and mail sent"
• Debugged CRM_Core_Payment_BaseIPN:completeTransaction (CRM/Core/Payment/BaseIPN.php), and checked at the end of the function. The condition for sending mail evaluates to TRUE, but the sendMail function does not do anything
• stepped into the IPN sendMail function and then into CRM_Contribute_BAO_ContributionPage:sendMail function (CRM/Contribute/BAO/ContributionPage.php). Traced the execution of the code all the way up to self::buildCustomDisplay($postID, 'customPost', $userID, $template, $params['custom_post_id']). That was the last line in the function that would execute.
• I am using the latest 4.2 stable version from SVN (45716)