I've found the bug, and have fixed it as described below. I don't think this is the best way to fix it, but it did prove my theory on how the bug was occuring. The problem occurs due to the interaction between drain_outgoing (in Channel.pm) and client_loop in (SSH2.pm). If your $stdout is bigger than remote_maxpacket, drain_outgoing tries to repeatedly call client_loop until the length is reduced to zero. The problem is that client_loop will not return back to drain_outgoing, once it is called from inside the while loop the second time. MY FIX: I reasoned that if I could force the client_loop to execute one-and-only-one-time, for each time it was called from the drain_outgoing while loop, there would be no problem. To test this, I did the following:
1.) drain_outgoing: added the following line before the while loop

2.) drain_outgoing: added the following line after the while loop

3.) client_loop: added the following line just before the end of the first while loop

This seems to have fixed it for all scenarios that I've tested.
Please let me know if there is a better way to fix this, and how we can get the fix officially into the module.
-Craig