You abandon that transaxle?
Probably a good thing in the long run. Those Spicer transaxles use a weak clutch key to select the drive gear. Even single geared, if you didn't hard tack that shaft, you can expect to spin that key out in a hurry. Doesn't take much torque at all to shear/deform that bad boy. I know. I just went through trying to heat and rebend the existing keys to work and ended up having to replace it.
As far as it spinning then locking up, on the reassemble, did you make sure to line up the groove on the gear selector collar with the pin on the actual selector bar? That, and make sure you have the axles lined up right in the ring gear. It'll seal up off a tooth and will give a spin or two before freezing.
There's mods you can do to run gear oil in it that are pretty simple and straight forward. Might consider that, too. First time I cracked open mine it was greased, but it was thrown in every corner and cranny in the box with very little on the gears themselves. At least with a 90w it'd bathe the gears.
Keep us posted. I'm curious how you're going to run a live axle on a horizontal shaft without a transaxle/RAGB. I've cherrypicked a few ideas on here myself with an idler, but I got a feeling I'd lose so much efficiency it'd be a waste.