Jim:
When any thing "bleeds through" a primer or a paint, what's actually happening is that something in that "thing" is dissolving in the primer or paint.

Fortunately, there are FEW things that are soluble in both water and mineral spirits, and so if your stain bleeds through a latex paint or primer, the usual fix is to use an oil based paint or primer, and vice versa.

Wood knots are full of a family of chemicals called "tannins" because they were used in the early leather tanning industry in the USA. So far as I know, all tannins are soluble in water, and that is why the knots bled through your latex KILZ, but not your oil based KILZ.

There was nothing wrong with the KILZ you threw out, it's just that it was being used for a purpose it really wasn't meant for. They really SHOULD put this stuff on stain sealers, it's just that it's easier to sell someone something than to educate them on what they should buy.