Fixed it! With some help from a nice guy on another forum, but this was the solution: The recv call was getting stuck in a loop when the telnet session died unexpectedly - this might be a perl bug. The solution involved IO::Select, which works like a champ:

# this is the fork's parent, the master's child
      if ($kidpid) {
          set_state("$rs_info <-- $lc_info");
          my $buf = "";
          select($remote_server); $| = 1;
          my $s=IO::Select->new(); 
          $s->add($local_client);
          while (my @ready=$s->can_read())  {
            my $r=recv($local_client,$buf,1,0);
            warn "local recv - $!" unless(defined($r));
            last unless(length($buf));
            print $buf;
          };
          print STDOUT "Child Exiting: $lc_info --> $rs_info\n" if $de
+bug;
          log_info(0,$user,$lc_info,$rs_info); # Log disconnect
          kill('TERM', $kidpid);      # kill my twin cause we're done
          }
      # this is the fork's child, the master's grandchild
      else {
          set_state("$rs_info --> $lc_info");
          my $buf = "";
          select($local_client); $| = 1;
          my $s=IO::Select->new(); 
          $s->add($remote_server);
          while (my @ready=$s->can_read())  {
            my $r=recv($remote_server,$buf,1,0);
            warn "remote recv - $!" unless(defined($r));
            last unless(length($buf));
            print $buf;
          };
          print STDOUT "Grandchild Exiting: $lc_info <-- $rs_info\n" i
+f $debug;
          kill('TERM', getppid());    # kill my twin cause we're done
      }
[download]

Thanks everyone, for your help on this.

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"Non sequitur. Your facts are un-coordinated." - Nomad