Exhibit 10.40.1
AMENDMENT TO
JOHN K. DELANEY
EMPLOYMENT AGREEMENT
     THIS AMENDMENT TO THE EMPLOYMENT AGREEMENT (“Amendment”) is made, effective
as of December 31, 2008, by and between CapitalSource Inc., a Delaware
corporation (the “Company”), and John K. Delaney (the “Executive”).
Recitals:
     WHEREAS, the Executive and the Company previously entered into the
Employment Agreement, effective as of June 6, 2006 (the “Employment Agreement”);
and
     WHEREAS, the Executive and the Company desire to further amend the
Employment Agreement to comply with the requirements of Section 409A of the
Internal Revenue Code of 1986, as amended.
Agreement:
     NOW, THEREFORE, in consideration of the agreements contained herein and of
such other good and valuable consideration, the sufficiency of which the
Executive acknowledges, the Company and the Executive, intending to be legally
bound, agree as follows:
          1. Section 9(d) of the Employment Agreement is hereby amended by
adding a new sentence at the end of said Section 9(d) to read as follows:
“The Executive will forfeit all rights to the Severance Payments if the
Executive fails to execute and deliver the release within 30 days of delivery of
the release to the Executive. ”
          2. Section 9(g) of the Employment Agreement is hereby deleted in its
entirety and amended and restated to read as follows:
“(g) Section 409A. To the extent the Executive would be subject to the
additional 20% tax imposed on certain deferred compensation arrangements
pursuant to Section 409A of the Internal Revenue Code of 1986, as amended (the
“Code”), as a result of any provision of this Agreement, such provision shall be
deemed amended to the minimum extent necessary to avoid application of such tax
and preserve to the maximum extent possible the original intent and economic
benefit to the Executive and the Company, and the parties shall promptly execute
any amendment reasonably necessary to implement this Section 9(g).

 

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               (i) For purposes of Section 409A, the Executive’s right to
receive installment payments pursuant to this Agreement including, without
limitation, each severance payment and COBRA continuation reimbursement shall be
treated as a right to receive a series of separate and distinct payments.
               (ii) The Executive will be deemed to have a Date of Termination
for purposes of determining the timing of any payments or benefits hereunder
that are classified as deferred compensation only upon a “separation from
service” within the meaning of Code Section 409A.
               (iii) Notwithstanding any other provision of this Agreement to
the contrary, if at the time of the Executive’s separation from service, (i) the
Executive is a specified employee (within the meaning of Section 409A and using
the identification methodology selected by the Company from time to time), and
(ii) the Company makes a good faith determination that an amount payable on
account of such separation from service to the Executive constitutes deferred
compensation (within the meaning of Section 409A) the payment of which is
required to be delayed pursuant to the six-month delay rule set forth in
Section 409A in order to avoid taxes or penalties under Section 409A (“the Delay
Period”), then the Company will not pay such amount on the otherwise scheduled
payment date but will instead pay it in a lump sum on the first business day
after such six-month period (or upon the Executive’s death, if earlier),
together with interest for the period of delay, compounded annually, equal to
the prime rate (as published in the Wall Street Journal) in effect as of the
dates the payments should otherwise have been provided. To the extent that any
benefits to be provided during the Delay Period is considered deferred
compensation under Code Section 409A provided on account of a “separation from
service,” and such benefits are not otherwise exempt from Code Section 409A, the
Executive shall pay the cost of such benefit during the Delay Period, and the
Company shall reimburse the Executive, to the extent that such costs would
otherwise have been paid by the Company or to the extent that such benefits
would otherwise have been provided by the Company at no cost to the Executive,
the Company’s share of the cost of such benefits upon expiration of the Delay
Period, and any remaining benefits shall be reimbursed or provided by the
Company in accordance with the procedures specified herein.
               (iv) (A) Any amount that the Executive is entitled to be
reimbursed under this Agreement will be reimbursed to the Executive as promptly
as practical and in any event not later than the last day of the calendar year
after the calendar year in which the expenses are incurred, (B)

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any right to reimbursement or in kind benefits will not be subject to
liquidation or exchange for another benefit, and (C) the amount of the expenses
eligible for reimbursement during any taxable year will not affect the amount of
expenses eligible for reimbursement in any other taxable year.
               (v) Whenever a payment under this Agreement specifies a payment
period with reference to a number of days (e.g., “payment shall be made within
thirty (30) days following the date of termination”), the actual date of payment
within the specified period shall be within the sole discretion of the Company.
          3. The fourth sentence of Section 10(b) of the Employment Agreement is
hereby amended and restated to read as follows:
“Any Gross-Up Payment, as determined pursuant to this Section 10 shall be paid
by the Employer to the Executive within five days of receipt of the Accounting
Firm’s determination, but in no event later than the end of the taxable year
following the taxable year in which the related taxes are remitted by the
Executive.”
          4. The provisions of this Amendment may be amended and waived only
with the prior written consent of the parties hereto. This Amendment may be
executed and delivered in one or more counterparts, each of which shall be
deemed an original and together shall constitute one and the same instrument.
          5. Except as set forth in this Amendment, the Employment Agreement
shall remain unchanged and shall continue in full force and effect.
     IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment on the date first written above.

            CAPITALSOURCE INC.
      By:   /s/ DEAN C. GRAHAM         Name:   Dean C. Graham        Title:  
President and Chief Operating Officer        EXECUTIVE
      By:   /s/ JOHN K. DELANEY         John K. Delaney             

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