Exhibit 10.38

Change-in-Control Severance Agreement

This Change-in-Control Severance Agreement (the “Agreement”) is made as of the
2nd day of February, 2016 (the “Effective Date”), by and between Kindred
Healthcare Operating, Inc., a Delaware corporation (the “Company”) and DAVID
CAUSBY (the “Employee”).

Recitals:

 

A.

The Employee is employed by the Company, a wholly owned subsidiary of Kindred
Healthcare, Inc. (the “Parent”).

 

B.

The Company recognizes that the Employee’s contribution to the Company’s growth
and success will be significant.

 

C.

The Company wishes to encourage the Employee to remain with and devote full time
and attention to the business affairs of the Company and wishes to provide
income protection to the Employee for a period of time in the event of a Change
in Control.

Now, therefore, in consideration of the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

Agreement

1. Definitions.

a. “Base Salary” shall mean the Employee’s regular annual rate of base pay in
gross as of the date in question as elected under Paragraph 3(a).

b. “Cause” shall mean the Employee’s (i) conviction of or plea of nolo
contendere to a crime involving moral turpitude; or (ii) willful and material
breach by Employee of his duties and responsibilities, which is committed in bad
faith or without reasonable belief that such breaching conduct is in the best
interests of the Company, but with respect to (ii) only if the Board of
Directors of Parent (the “Board”) adopts a resolution by a vote of at least 75%
of its members so finding after giving the Employee and his attorney an
opportunity to be heard by the Board.

c. “Change in Control”  The term “Change in Control” shall mean any one of the
following events occurring after the date of this Agreement:

(i) An acquisition (other than directly from Parent) of any voting securities of
Parent (the “Voting Securities”) by any “Person” (as defined in Paragraph 1(f)
hereof) immediately after which such Person has “Beneficial Ownership” (within
the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (the “1934
Act”) of 20% or more of the combined voting power of Parent’s then outstanding
Voting Securities; provided, however, that in determining whether a Change in
Control has occurred, Voting Securities which are acquired in an acquisition by
(i) Parent or any of its subsidiaries, (ii) an employee benefit plan (or a trust
forming a part thereof) maintained by Parent or any of its subsidiaries or (iii)
any Person in connection with an acquisition referred to in the immediately
preceding clauses (i) and (ii) shall not constitute an acquisition which would
cause a Change in Control.

(ii) The individuals who, as of the Effective Date, constituted the Board of
Directors of Parent (the “Incumbent Board”) cease for any reason to constitute
over 50% of the Board; provided, however, that if the election, or nomination
for election by Parent’s stockholders, of any new director was approved by a
vote of over 50% of the Incumbent Board, such new director shall, for purposes
of this Section 1(c)(ii), be considered as though such person were a member of
the Incumbent Board; provided, further, however, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened “Election Contest” (as
described in Rule 14a‑11 promulgated under the 1934 Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors of Parent (a “Proxy Contest”), including by reason
of any agreement intended to avoid or settle any Election Contest or Proxy
Contest.

(iii) Consummation of a merger, consolidation or reorganization involving
Parent, unless each of the following events occurs in connection with such
merger, consolidation or reorganization:

(A) the stockholders of Parent, immediately before such merger, consolidation or
reorganization, own, directly or indirectly immediately following such merger,
consolidation or reorganization, over 50% of the combined voting power of all
voting securities of the corporation resulting from such merger or consolidation
or reorganization (the “Surviving

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Company”) over which any Person has Beneficial Ownership in substantially the
same proportion as their ownership of the Voting Securities immediately before
such merger, consolidation or reorganization;

(B) the individuals who were members of the Incumbent Board immediately prior to
the execution of the agreement providing for such merger, consolidation or
reorganization constitute over 50% of the members of the board of directors of
the Surviving Company; and

(C) no Person (other than Parent, any of its subsidiaries, any employee benefit
plan (or any trust forming a part thereof) maintained by Parent, the Surviving
Company or any Person who, immediately prior to such merger, consolidation or
reorganization had Beneficial Ownership of 20% or more of the then outstanding
Voting Securities) has Beneficial Ownership of 20% or more of the combined
voting power of the Surviving Company’s then outstanding voting securities.

(iv) Approval by Parent’s stockholders of a complete liquidation or dissolution
of Parent.

(v) Approval by Parent’s stockholders of an agreement for the sale or other
disposition of all or substantially all of the assets of Parent to any Person
(other than a transfer to a subsidiary of Parent).

(vi) Any other event that the Board shall determine constitutes an effective
Change in Control of Parent.

(vii) Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the “Subject Person”) acquired Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by Parent which, by reducing
the number of Voting Securities outstanding, increases the proportional number
of shares Beneficially Owned by the Subject Person; provided that if a Change in
Control would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by Parent, and after such share acquisition by
Parent, the Subject Person becomes the Beneficial Owner of any additional Voting
Securities which increases the percentage of the then outstanding Voting
Securities Beneficially Owned by the Subject Person, then a Change in Control
shall occur.

d. “Change-in-Control Date” shall mean the date immediately prior to the
effectiveness of the Change in Control.

e. “Good Reason” The Employee shall have good reason to terminate employment
with the Company if (i) the Employee’s title, duties, responsibilities or
authority is reduced or diminished from those in effect on the Change-in-Control
Date without the Employee’s written consent; (ii) the Employee’s compensation is
reduced; (iii) the Employee’s benefits are reduced, other than pursuant to a
uniform reduction applicable to all managers of the Company; or (iv) the
Employee is asked to relocate his office to a place more than 30 miles from his
business office on the Change-in-Control Date.

f. “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of
the 1934 Act and used in Sections 13(d) and 14(d) thereof, including a “group”
as defined in Section 13(d).

g. “Target Bonus” shall mean the Employee’s target annual short-term incentive
bonus for the calendar year in which the date in question occurs.

h. “Termination of Employment” shall mean (i) the termination of the Employee’s
employment by the Company other than such a termination in connection with an
offer of immediate reemployment by a successor or assign of the Company or a
purchaser of the Company or its assets under terms and conditions which would
not permit the Employee to terminate his employment for Good Reason; or (ii) the
Employee’s resignation for Good Reason.

2.Term.  The initial term of this Agreement shall be for a three-year period
commencing on the Effective Date (the “Term”).  The Term shall be automatically
extended by one additional day for each day beyond the Effective Date that the
Employee remains employed by the Company until such time as the Company elects
to cease such extension by giving written notice of such election to the
Employee.  In such event, the Agreement shall terminate on the third anniversary
of the effective date of such election notice.  Notwithstanding the foregoing,
this Agreement shall automatically terminate if and when the Employee terminates
his employment with the Company other than in connection with a
Change-in-Control or two years after the Change-in-Control Date, whichever first
occurs.

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3. Severance Benefits.  If at any time following a Change in Control and
continuing for two years thereafter, the Company terminates the Employee without
Cause, or the Employee terminates employment with the Company for Good Reason,
then as compensation for services previously rendered the Employee shall be
entitled to the following benefits:

a. Cash Payment.  The Employee shall be paid a cash severance payment equal to
2.9 times the greater of:

(i) the sum of the Employee’s Base Salary and Target Bonus as of the Termination
of Employment, or

(ii) the sum of the Employee’s Base Salary and Target Bonus as of the
Change-in-Control Date.

Payment shall be made in a single lump sum upon the effective date of Employee’s
Termination of Employment. For purposes of clarification, the Employee shall not
be entitled to payment of an annual bonus (or pro-rated portion thereof)
pursuant to the applicable short-term incentive plan of the Company for the year
in which the Employee’s Termination of Employment occurs.   Notwithstanding
anything herein to the contrary, if at the time of Employee’s separation from
service Employee is a “specified employee” as defined in Section 409A of the
Internal Revenue Code of 1986, as amended and the regulations promulgated
thereunder (the “Code”) and the deferral of the payment payable pursuant to this
Section 3(a) is necessary in order to prevent any accelerated or additional tax
under Section 409A of the Code, then the payment to which Employee would
otherwise be entitled during the first six months following his separation from
service shall be deferred and accumulated (without any reduction in such payment
ultimately paid to Employee) for a period of six months from the date of
separation from service and paid in a lump sum on the first day of the seventh
month following such separation from service (or, if earlier, the date of
Employee’s death), together with interest during such period at a rate computed
by adding 2.00% to the Prime Rate as published in the Money Rates section of the
Wall Street Journal, or other equivalent publication if the Wall Street Journal
no longer publishes such information, on the first publication date of the Wall
Street Journal or equivalent publication after the date of Employee’s separation
from service (provided that if more than one such Prime Rate is published on any
given day, the highest of such published rates shall be used).

b. Continuation of Benefits.

(i) For a period of three years following the Termination of Employment (the
“Benefit Continuation Period”), the Employee shall be treated as if Employee had
continued to be an executive for all purposes under the Company’s health
insurance plan and dental insurance plan; or if the Employee is prohibited from
participating in such plans, the Company shall otherwise provide such
benefits.  Employee shall be responsible for any employee contributions for such
insurance coverage.  Following the Benefit Continuation Period, Employee shall
be entitled to receive continuation coverage under Part 6 of Title I of ERISA
(“COBRA Benefits”) by treating the end of this period as the applicable
qualifying event (i.e., as a Termination of Employment) for purposes of ERISA
Section 603(2) and with the concurrent loss of coverage occurring on the same
date, to the extent allowed by applicable law.

(ii) For the Benefit Continuation Period, the Company shall maintain in force,
at its expense, the Employee’s life insurance in effect under the Company’s
voluntary life insurance benefit plan as of the Change-in-Control Date or as of
the date of Termination of Employment, whichever coverage limits are greater.
For purposes of clarification, the portion of the premiums in respect of such
voluntary life insurance for which Employee and the Company are responsible,
respectively, shall be the same as the portion for which the Company and
Employee are responsible, respectively, immediately prior to the date of
Termination of Employment or the Change-in-Control Date, as applicable.

(iii) For the Benefit Continuation Period, the Company shall provide short-term
and long-term disability insurance benefits to Employee equivalent to the
coverage that the Employee would have had had Employee remained employed under
the disability insurance plans applicable to Employee on the date of Termination
of Employment, or, at the Employee’s election, the plans applicable to Employee
as of the Change-in-Control Date.  Should Employee become disabled during such
period, Employee shall be entitled to receive such benefits, and for such
duration, as the applicable plan provides. For purposes of clarification, the
portion of the premiums in respect of such short-term and long-term disability
benefits for which Employee and the Company are responsible, respectively, shall
be the same as the portion for which Employee and the Company are responsible,
respectively, immediately prior to the date of Termination of Employment or the
Change-in-Control Date, as applicable.

(iv) Notwithstanding anything in this Agreement to the contrary, in no event
shall the provision of in-kind benefits pursuant to this Section 3 during any
taxable year of Employee affect the provision of in-kind benefits pursuant to
this Section 3 in any other taxable year of Employee.

c. Retirement Savings Plan.  Within fifteen (15) days after the date of
Termination of Employment, the Company shall pay to Employee a cash payment in
an amount, if any, necessary to compensate Employee for the Employee's unvested
interests under the Company's retirement savings plan which are forfeited by
Employee in connection with the Termination of Employment.

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d. Plan Amendments.  The Company will use reasonable efforts to adopt such
amendments to its employee benefit plans, if any, as are necessary to effectuate
the provisions of this Agreement.

e. Maximum Award Limitation.  Notwithstanding anything herein to the contrary,
the benefits payable under this Agreement will be reduced in order to comply
with any executive severance policy the Company has adopted from time to time.  

f. General Release of Claims.  Notwithstanding anything herein to the contrary,
the amounts payable pursuant to this Section 3 are subject to the condition that
Employee has delivered to the Company an executed copy of an irrevocable general
release of claims in a form satisfactory to the Company within the 60 day period
immediately following the Employee’s separation from service (the “Release
Period”).  Any payment that otherwise would be made prior to Employee’s delivery
of such executed release pursuant to this Section 3 shall be paid on the first
business day following the conclusion of the Release Period; provided that
in-kind benefits provided pursuant to subsections (b)(i), (ii) and (iii) of this
Section 3 shall continue in effect after separation from service pending the
execution and delivery of such release for a period not to exceed 60 days;
provided further that if such release is not executed and delivered within such
60-day period, Employee shall reimburse the Company for the full cost of
coverage during such period.

4. No Mitigation Required or Setoff Permitted.  In no event shall Employee be
obligated to seek other employment or take other action by way of mitigation of
the amounts payable to Employee under the terms of this Agreement, and all such
amounts shall not be reduced whether or not Employee obtains other
employment.  Further, the Company’s and Parent’s obligations to make any
payments hereunder shall not be subject to or affected by any setoff,
counterclaims or defenses which the Company or Parent may have against Employee
or others.

5. Waiver of Other Severance Benefits.  The benefits payable pursuant to this
Agreement are in lieu of any other severance benefits which may otherwise be
payable by the Company or its affiliates to the Employee upon Termination of
Employment pursuant to a severance program of the Company or its affiliates
(including, without limitation, any benefits to which Employee might otherwise
be entitled under any employment agreement or other severance or change in
control or similar agreement between Employee and the Company or any of its
affiliates).

6. Employment at Will.  Notwithstanding anything to the contrary contained
herein, the Employee’s employment with the Company is not for any specified term
and may be terminated by the Employee or by the Company at any time, for any
reason, with or without cause, without any liability, except with respect to the
payments provided hereunder or as required by law or any other contract or
employee benefit plan.

7. Disputes.  Any dispute or controversy arising under, out of, or in connection
with this Agreement shall, at the election and upon written demand of either
party, be finally determined and settled by binding arbitration in the City of
Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof.  The Company shall pay
all costs of the arbitration and all attorneys’ and accountants’ fees of the
Employee in connection therewith, including any litigation to enforce any
arbitration award.

8. Non-solicitation.  During the Term and for a period of one year thereafter
(collectively, the “Non-solicitation Period”), Employee shall not directly or
indirectly, individually or on behalf of any person other than the Company, aid
or endeavor to solicit or induce any of the Company’s or its affiliates'
employees to leave their employment with the Company or such affiliates in order
to accept employment with Employee or any other person, corporation, limited
liability company, partnership, sole proprietorship or other entity.  If the
restrictions set forth in this section would otherwise be determined to be
invalid or unenforceable by a court of competent jurisdiction, the parties
intend and agree that such court shall exercise its discretion in reforming the
provisions of this Agreement to the end that the Employee will be subject to a
non-solicitation covenant which is reasonable under the circumstances and
enforceable by the Company.  It is agreed that no adequate remedy at law exists
for the parties for violation of this section and that this section may be
enforced by any equitable remedy, including specific performance and injunction,
without limiting the right of the Company to proceed at law to obtain such
relief as may be available to it.  The running of the Non-solicitation Period
shall be tolled for any period of time during which Employee is in violation of
any covenant contained herein, for any reason whatsoever.

9. Successors; Binding Agreement.  This Agreement shall not be terminated by the
voluntary or involuntary dissolution of the Company or by any merger or
consolidation where the Company is not the surviving corporation, or upon any
transfer of all or substantially all of the Company’s stock or assets.  In the
event of such merger, consolidation or transfer, the provisions of this
Agreement shall be binding upon and shall inure to the benefit of the surviving
corporation or corporation to which such stock or assets of the Company shall be
transferred.

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10. Notices.  Any notice or other communication hereunder shall be in writing
and shall be effective upon receipt (or refusal of receipt) if delivered
personally, or sent by overnight courier if signature for the receiving party is
obtained, or sent by certified or registered mail, postage prepaid, to the other
party at the address set forth below:

 

If to the Company:

 

Kindred Healthcare Operating, Inc.

680 South Fourth Street

Louisville, Kentucky 40202

Attention:  General Counsel

 

 

 

If to Employee:

 

David Causby

at the address on file with the Company

Either party may change its specified address by giving notice in writing to the
other.

11. Indemnification.  The Company shall indemnify, defend and hold the Employee
harmless from and against any liability, damages, costs and expenses (including
attorneys’ fees) in connection with any claim, cause of action, investigation,
litigation or proceeding involving him by reason of his having been an officer,
director, employee or agent of the Company, except to the extent it is
judicially determined that the Employee was guilty of gross negligence or
willful misconduct in connection with the matter giving rise to the claim for
indemnification.  This indemnification shall be in addition to and shall not be
substituted for any other indemnification or similar agreement or arrangement
which may be in effect between the Employee and the Company or may otherwise
exist.  The Company also agrees to maintain adequate directors and officers
liability insurance, if applicable, for the benefit of Employee for the term of
this Agreement and for five years thereafter.

12. ERISA.  Many or all of the employee benefits addressed in Paragraph 3(b) and
(c) exist under plans which constitute employee welfare benefit plans (“Welfare
Plans”) within the meaning of Section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”).  Any payments pursuant to this
Agreement which could cause any of such Plans not to constitute a Welfare Plan
shall be deemed instead to be made pursuant to a separate “employee pension
benefit plan” within the meaning of Section 3(2) of ERISA or a “top hat” plan
under Section 201(2) of ERISA as to which the applicable portions of the
document constituting the Welfare Plan shall be deemed to be incorporated by
reference.  None of the benefits hereunder may be assigned in any way.

13. Severability.  The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision, which other provision shall remain in full force and effect.

14. Interpretation.  The headings used herein are for convenience only and do
not limit or expand the contents of this Agreement.  Use of any male gender
pronoun shall be deemed to include the female gender also.

15. No Waiver.  No waiver of a breach of any provision of this Agreement shall
be construed to be a waiver of any other breach of this Agreement.  No waiver of
any provision of this Agreement shall be enforceable unless it is in writing and
signed by the party against whom it is sought to be enforced.

16. Survival.  Any provisions of this Agreement creating obligations extending
beyond the term of this Agreement shall survive the expiration or termination of
this Agreement, regardless of the reason for such termination.

17. Amendments.  Any amendments to this Agreement shall be effective only if in
writing and signed by the parties hereto.

18. Entire Agreement.  This Agreement constitutes the entire agreement of the
parties with respect to the subject matter hereof.

19. Governing Law.  This Agreement shall be interpreted in accordance with and
governed by the law of the State of Delaware.

20. Section 409A.

a. The intent of the parties is that payments and benefits under this Agreement
comply with or otherwise be exempt from Section 409A of the Code and the
regulations and guidance promulgated thereunder and, accordingly, to the maximum
extent permitted, this Agreement shall be interpreted either to be exempt from
or in compliance therewith.

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b. For purposes of Section 409A of the Code, (i) the Employee may not, directly
or indirectly, designate the calendar year of any payment; (ii) no acceleration
of the time and form of payment of any nonqualified deferred compensation to the
Employee or any portion thereof, shall be permitted; and (iii) each payment in a
series of payments hereunder shall be deemed to be a separate payment for
purposes of Section 409A.

c. For purposes of Section 409A of the Code, your right to receive any
installment payment pursuant to this Agreement will be treated as a right to
receive a series of separate and distinct payments.

d. To the extent that any right to reimbursement of expenses or payment of any
benefit in-kind under this Agreement may constitute nonqualified deferred
compensation (within the meaning of Section 409A of the Code), (i) any such
expense reimbursement shall be made by the Company no later than the last day of
the taxable year following the taxable year in which such expense was incurred
by the Employee, (ii) the right to reimbursement or in-kind benefits shall not
be subject to liquidation or exchange for another benefit, and (iii) the amount
of expenses eligible for reimbursement or in-kind benefits provided during any
taxable year shall not affect the expenses eligible for reimbursement or in-kind
benefits to be provided in any other taxable year; provided, that the foregoing
clause shall not be violated with regard to expenses reimbursed under any
arrangement covered by Section 105(b) of the Code solely because such expenses
are subject to a limit related to the period the arrangement is in effect.

e. A Termination of Employment shall not be deemed to have occurred for purposes
of any provision of this Agreement providing for the payment of “deferred
compensation” (as such term is defined in Section 409A of the Code) upon or
following Termination of Employment unless such Termination of Employment is
also a “separation from service” from the Company within the meaning of Section
409A and Treasury Regulation 1.409A-1(h) and, for purposes of any such provision
of this Agreement, references to a “Termination of Employment” or any similar
term or phrase shall mean “separation from service.”

f. If any provision of this Agreement (or any award of compensation or benefits
provided under this Agreement) would cause the Employee to incur any additional
tax or interest under Section 409A of the Code, the Company shall reform such
provision to comply with 409A and agrees to maintain, to the maximum extent
practicable without violating 409A of the Code, the original intent and economic
benefit to the Employee of the applicable provision; provided that nothing
herein shall require the Company to provide the Employee with any gross-up for
any tax, interest or penalty incurred by the Employee under Section 409A of the
Code.  Furthermore, notwithstanding anything herein to the contrary, no payment
or benefit payable under this Agreement shall be required to be paid or provided
in any calendar year if the payment of such payment or benefit would constitute
an impermissible acceleration under Section 409A of the Code and the transition
guidance thereunder and such payment shall instead be paid as soon as
practicable in the next calendar year, without interest.

g. Any reduction in payments and benefits made pursuant to the provisions of
this Agreement will be determined by the Company in its sole discretion
according with the following: (i) first, reductions will be made to amounts that
do not constitute nonqualified deferred compensation (within the meaning of
Section 409A of the Code); and (ii) second, reductions will be made to amounts
that do constitute nonqualified deferred compensation based on the date that
such amounts become payable, with the amount payable latest in time being
reduced first.

21. Counterparts.  This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, and all of which together shall
constitute one and the same instrument.

[Remainder of page is intentionally blank. Signatures follow.]

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

 

KINDRED HEALTHCARE OPERATING, INC.

 

 

 

By:

 

/s/ Benjamin A. Breier

 

 

Benjamin A. Breier

 

 

President and Chief Executive Officer

 

Solely for the purposes of Sections 3, 4 and 11:

 

KINDRED HEALTHCARE, INC.

 

 

 

By:

 

/s/ Benjamin A. Breier

 

 

Benjamin A. Breier

 

 

President and Chief Executive Officer

 

 

 

/s/ David Causby

 

 

David Causby

 

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