[Excaliber]

Strange the wheel "locks up" when the bearings are tight enough to be pre-loaded. Which is exactly what your trying to do when you adjust the wheel bearings, "pre-load" them. Thus the nut needs to be tightened some amount AFTER zero is reached, perhaps an 1/8th turn or so.

I've never seen a situation where the wheels totally "lock up" when apply this reasonable amount of pre-load to the bearing. It makes me wonder what is really going on in there.

Perhaps the bearing cone secured inside the hub is in place at a slight angle? Something mechanically has to be binding as some pre-load HAS to be there. The tire might turn a little stiffly, but no way should lock up.

Try removing the caliper and adjusting with it off. Perhaps the caliper assembly is binding in some way?