Full Opinion

NOT DESIGNATED FOR PUBLICATION No. 129,736 IN THE COURT OF APPEALS OF THE STATE OF KANSAS KANSAS DEPARTMENT OF COMMERCE Appellee, v. BELLWETHR, INC., Appellant. MEMORANDUM OPINION Appeal from Shawnee District Court; TERESA L. WATSON, judge. Oral argument held August 18, 2026. Opinion filed November 13, 2026, 2026. Affirmed. Christopher S. Dove and Mandi R. Hunter, of Hunter Law Group, P.A., of Prairie Village, for appellant. Ryan J. Ott, assistant solicitor general, and Kris W. Kobach, attorney general, for appellee. Before HILL, P.J., SCHROEDER and COBLE, JJ. HILL, J.: This is an appeal of a district court judgment holding that Bellwethr, Inc., breached its 2019 investor tax credit agreement with the Kansas Department of Commerce. The court held that in August 2022, the company breached its agreement when Bellwethr sold all of its assets to an out-of-state company, fired all of its employees, and had no further production under the Bellwethr name in Kansas. In this appeal, Bellwethr admits it did sell an asset, but the court erred when it concluded it had breached its agreement. After all, in its view, one employee remains working in Kansas. We are not persuaded by Bellwethr's arguments and affirm the district court's judgment. 1 Tax credits are used as incentives to foster business in Kansas. Based in Wamego, Kansas, Bellwethr, Inc., a startup company that developed artificial intelligence-based computer programs, began its business in 2016. Matthew Moody is the founder and its chief executive officer. At that time, Bellwethr had three employees, including Moody, and contracted with other independent contractors. In May 2019, Bellwethr agreed with the Kansas Department of Commerce to use tax credits to induce investment in the company under the Kansas Angel Investor Tax Credit Act (the Act), K.S.A. 74-8131 et seq. The Act's aim is to help Kansas companies that have little access to capital get off the ground. K.S.A. 74-8131(a). In the Kansas Angel Investor Tax Credit Agreement (Agreement), Bellwethr represented that it: "A. Currently has its headquarters in Kansas and one of the following: 1. 60% or more of its employees located in Kansas; or 2. 80% of its production occurs in Kansas. "B. Will maintain its headquarters and qualifying operations in Kansas for a period of ten (10) years from the date of this Agreement as required by KSA 74-8136(g)." The Department agreed to allocate up to $150,000 in Kansas Angel Investor tax credits to investors in Bellwethr. In the event that Bellwethr relocated its headquarters and its qualifying operations, the Agreement called for repayment: "In the event Qualified Kansas Business relocates its headquarters and qualifying operations from Kansas to another state during the term of this Agreement, then Qualified Kansas Business shall repay Commerce an amount equal to the amount of Angel Investor 2 Tax Credits it issued under this Agreement. Such repayment shall be payable immediately. Qualified Kansas Business shall be considered as having relocated its headquarters operations outside of Kansas if Commerce determines its headquarters is not located in Kansas or if either 60% of its employees or 80% of its production are not located in Kansas, regardless of its headquarters location." The term of the Agreement was 10 years. Bellwethr sells out to a Utah company. Bellwethr sold substantially all of its assets in August 2022 to Retextion, Inc., a company headquartered in the state of Utah. Bellwethr sold its assets to Retextion in exchange for "cash plus stock." The asset purchase agreement states Retextion purchased Bellwethr's proprietary and intellectual property rights, customers, contracts, domain names, books, records, accounts receivable, all prepaid expenses, rights under warranties, insurance benefits, and goodwill. Among the assets that Bellwethr sold to Retextion was its "core product," Retention Engine, which was Bellwethr's most successful product and was responsible for a "good percentage" of Bellwethr's total revenues. Bellwethr had one other revenue- generating product, which was a banking software product. That product was later abandoned. Bellwether's agreement with Retextion provided that Bellwethr "shall terminate all employees . . . who are actively at work on the Closing Date. Buyer shall offer employment, on an 'at will' basis, to all such employees." 3 After that, Retextion hired two of Bellwethr's employees, including Moody, and a couple of contractors. After the sale to Retextion, Bellwethr was left with no revenue- generating products. Bellwethr is not now marketing any future products under the Bellwethr name. The Department acts. After the sale, Rachell Rowand, program manager for the Angel Investor Program at the Department of Commerce, saw a news article reporting that Bellwethr had been acquired by another company. In September 2022, Rowand emailed Moody and asked him how the company would be maintaining its obligations under the Agreement after the acquisition. Moody affirmed that the company had been acquired. He wrote back, "Acquisition was for cash plus stock. We will be dissolving the company since the assets have been acquired. The acquirer is not in Kansas and has most of its employees in Utah." In response to this sale, the Department, in December 2022, demanded repayment of $147,500 of the tax credits. When Bellwethr did not repay the tax credits, Commerce filed this breach of contract lawsuit. At the bench trial, Moody claimed that Bellwethr was still headquartered in Kansas and its one employee, himself, remained in Kansas. He testified he had a sports software program in the development stage that was not for sale and had generated no revenue. He decided not to dissolve Bellwethr after the communication with Department of Commerce. The court ruled that the asset sale triggered the repayment provision in the Agreement because more than 60% of Bellwethr's pre-sale employees are no longer in Kansas and more than 80% of its pre-sale production is no longer in Kansas. The court 4 explained, "Under Bellwethr's interpretation of the Agreement, a company may obtain tax credits for its investors, then sell its valuable component parts to an out-of-state entity, terminate all employees except its founder, retain its Kansas corporate shell, and escape repayment of the tax credits. This is unreasonable." The court entered judgment against Bellwethr in the amount of $147,500. Bellwethr appeals, raising three arguments. First, the company complains that the trial court failed to follow its own pretrial order to Bellwethr's detriment. Second, the district court's ruling misinterpreted their contract. And third, the court's ruling thwarts the legislative intent of the Kansas Angel Investor Act. Did the court misinterpret its pretrial order? Bellwethr contends the trial court erred by disregarding "the binding pretrial order." The court thus allowed the Department of Commerce to pursue a new legal theory. The Department of Commerce claimed that the contract breach occurred from Bellwethr's sale of its assets, including the assertion that the sale resulted in Bellwethr no longer having 60% of its employees or 80% of its production in Kansas. A district court's interpretation of its pretrial order is reviewed for an abuse of discretion. Koser v Atchison, Topeka & Santa Fe Ry. Co., 261 Kan 46, 61 928 P.2d 85 (1996) A court abuses its discretion if its decision is (1) arbitrary, fanciful, or unreasonable; (2) based on a legal error; or (3) based on a factual error. The party alleging an abuse of discretion bears the burden of demonstrating it. In re A.S., 319 Kan. 396, 400, 555 P.3d 732 (2024). That means it is Bellwether's burden to show any abuse of discretion here. 5 A review of the record is helpful at this point. In its petition claiming that Bellwethr breached the Agreement, Commerce alleged that: 1. In 2019, Bellwethr entered into a Kansas Angel Investor Tax Credit Agreement with Commerce for tax credits received in exchange for Bellwethr maintaining its headquarters and operating in Kansas for ten years. 2. Bellwethr received $145,500 in tax credits. 3. The Agreement required Bellwethr to maintain its headquarters and qualifying operations in Kansas for ten years. 4. In September 2023 Bellwethr provided Commerce with notice that it had been acquired by an out-of-state company and that Bellwethr would be dissolved. 5. The Agreement required Bellwethr repay Commerce the equivalent value of the tax credits it received if Bellwethr relocated its headquarters and qualifying operations out of Kansas during the Agreement's term. 6. Commerce demanded repayment under the Agreement. 7. By relocating out of state, or ceasing operations in Kansas, Bellwethr breached the Agreement and is liable for the repayment of its tax credits. The pretrial order listed two legal theories which Commerce would advance at trial to prove a breach of contract. The two theories were: (1) Bellwethr breached the Agreement by failing to provide annual reports for three years; and, (2) Bellwethr breached the Agreement through its sale of assets to Utah-based "Retextion" (now operating as New York-based company "Stay AI"). Before trial, Bellwethr moved for an order precluding Commerce from introducing evidence on claims not in the pretrial order and from introducing evidence of an alleged failure to file annual reports or loss of status as a Qualified Kansas Business. In response, Commerce argued that the pretrial order included substantially the same legal theory as its claim that Bellwethr's sale and acquisition resulted in Bellwethr's loss of its Qualified Kansas Business status. Commerce also argued that this theory would not prejudice 6 Bellwethr because Commerce had maintained the same position since the "very inception of this case." At the bench trial, the sole issue was whether Bellwethr breached the Agreement when it sold its assets to an out-of-state company which had the effect of relocating its qualifying operations outside Kansas, contrary to the Agreement. Commerce withdrew its first issue after the evidence and testimony failed to establish the claim. At the outset, Bellwethr sought to preclude Commerce from pursuing the relocation theory at trial, contending Commerce abandoned the theory by omitting it from the pretrial order. Bellwethr strictly construed the pretrial order to only allow Commerce to prove a breach of the Agreement based solely on Bellwethr's sale of its assets; and Bellwethr argued that any evidence about its operations, headquarters, and employees were no longer relevant to the claim and should be excluded. Commerce contended that the pretrial order theory and the relocation theory were the same. Commerce argued that the sale of Bellwethr's assets was the cause of the relocation and therefore was the cause of Bellwethr's breach of the Agreement. Commerce emphasized that its position has remained the same throughout the case and the effect of Bellwethr's assets sale to a company outside of Kansas has always been the central issue. The trial court agreed with Commerce, finding the theory to be part and parcel of the whole breach of the Agreement claim. The court thus permitted Commerce to pursue the relocation theory that Bellwethr breached the Agreement because Bellwethr's asset sale had the effect of relocating its qualifying operations out of state contrary to the Agreement. If we take a practical look at these circumstances, Bellwethr's sale of assets to an out-of-state company had the effect of relocating Bellwethr's qualifying business operations out of Kansas. Because its Agreement with the Department of Commerce 7 required Bellwethr to maintain its operations in Kansas, and the sale occurred during the Agreement's term, Bellwethr breached the Agreement. Commerce thus did not violate the pretrial order, nor did the trial court improperly modify the order by allowing Commerce to pursue the theory at trial. That the sale had the effect of breaching the Agreement does not present a different legal theory than that stated in the pretrial order because the two theories are part and parcel of Commerce's claim. Pretrial orders set out possible paths to take in litigation; they are not final rulings. "A pretrial order should be liberally construed to cover any possible legal or factual theories that might be embraced in its language." Black v. Don Schmid Motor, Inc., 232 Kan. 458, Syl. ¶ 6, 657 P.2d 517 (1983). "Large discretionary power is granted to the trial court in permitting or refusing modification and amendment of the issues outlined in a pretrial order." Black, 232 Kan. at 468. In Black, the court found that a trial court's decision to allow evidence of express warranty breach, a theory not specifically included in the pretrial order, was not erroneous. 232 Kan. at 468-69. The Black court also found that the Defendant was aware that the claims relied on by the Plaintiff included both implied and express warranty breach. 232 Kan. at 469. The court thus found that "[c]ertainly no surprise can be claimed, and the [defendant] has not indicated in what way he was prejudiced by the admission of this evidence, other than by an unfavorable jury verdict." Black, 232 Kan. at 469. Our record review reveals that throughout its case, Commerce maintained its contention that the sale of Bellwethr's assets to an out-of-state company resulted in the relocation of its qualifying operations out of Kansas, which breached the Agreement. Commerce asserted the relocation theory in its petition, trial brief, pretrial motion, and proposed findings of fact and conclusions of law. Bellwethr was aware of Commerce's arguments and theories that would prove Bellwethr breached the Agreement. Thus, 8 Bellwethr's claim that it lacked notice that Commerce would pursue the theory at trial is unpersuasive. The trial court here did not err in allowing Commerce to pursue the theory that Bellwethr's sale of its assets to an out-of-state company resulted in Bellwethr no longer maintaining qualified operations in Kansas, thus breaching the Agreement. Did the district court misinterpret this contract? Bellwethr argues that the district court's decision must be reversed because it grants a state agency unfettered authority to unilaterally declare a breach of contract based on a legitimate business transaction, thereby undermining the contractual certainty essential to the Angel Investor Tax Credit Act. That Act provides the context for our ruling. The purpose of the Act is to "assist in the creation and expansion of Kansas businesses, which are job and wealth creating enterprises, by granting tax credits against the Kansas income tax liability of investors investing in these businesses." (Emphasis added.) K.S.A. 74-8131(a). Tax credits are "a limited resource of the state" awarded to those businesses that "are most likely to provide the greatest economic benefit to the state." K.S.A. 2025 Supp. 74-8136(a). Under the Agreement, a "Qualified Kansas Business shall be considered as having relocated its headquarters operations outside of Kansas if Commerce determines its headquarters is not located in Kansas or if either 60% of its employees or 80% of its production are not located in Kansas, regardless of its headquarters location." Bellwethr sold "substantially all" of its assets to Retextion, Inc., a company with its headquarters in Utah, not Kansas. Bellwethr sold to Retextion its "core product," Retention Engine, and abandoned its only other revenue-generating product. Bellwethr's 9 agreement with Retextion provided that Bellwethr "shall terminate all employees" and Retextion would offer to hire those employees. Bellwethr is not now developing any future products under the Bellwethr name. Moody stated that he would "be dissolving the company since the assets have been acquired. The acquirer is not in Kansas and has most of its employees in Utah." It was only after Commerce demanded repayment of the $147,500 that Moody asserted that Bellwethr was still in business in Kansas with him as an employee (which under the agreement with Retextion was not allowed). Even if Moody is an employee of Bellwethr, Moody admitted that he has no plans to sell any products under the Bellwethr name. In other words, the sports program he was developing had nothing to do with Bellwethr. As the district court put it, Bellwethr was a corporate shell existing merely to escape liability under the Agreement. The Agreement is breached if either 60% of its employees or 80% of its production are not located in Kansas, regardless of its headquarters location. After the asset sale to Retextion, Bellwethr was to have no employees (according to its agreement with Retextion) and no production in Kansas. The employees and production did not merely disappear. Rather, they moved to Utah under another name. That was Bellwethr's agreement with Retextion. This was a breach of any reasonable interpretation of the Agreement. Bellwethr's interpretation of its Agreement with the Department of Commerce is not reasonable and could not be the intent of the parties if we consider the entire Agreement. The Agreement refers to the Angel Investor Tax Credit Act throughout. The tax credits paid were for job creation and innovation in Kansas, not in Utah. The district court did not grant Commerce unilateral authority to declare a breach. The court did not find breach under the "if Commerce determines its headquarters is not 10 located in Kansas" language. Instead, the court found that "more than 60% (2 of 3) of Bellwethr's pre-asset sale employees are no longer in Kansas, and 80% of its pre-asset sale production is no longer in Kansas." Bellwethr breached the tax credit Agreement, and judgment was correctly entered against it. Does the district court ruling discourage Kansas businesses? Finally, Bellwethr contends that the district court's interpretation of this contract undermines the purpose of the Angel Investment Act by discouraging out-of-state businesses from purchasing assets from Kansas startups. We remain unconvinced by this argument. The Act gives small Kansas startup businesses a useful tool to attract investors: Kansas tax credits. Contracts that have at least 60% of the employees working in Kansas or 80% of any production occurring in Kansas, by definition helps Kansas businesses because it is all accomplished within this state. Frankly, we see no deterrence to business as Bellwethr claims with this interpretation, but we do see promotion of Kansas businesses. The trial court's interpretation of the Act, and this contract states that Kansas tax credits should help build Kansas businesses. There is no reversible error here. Affirmed. 11