Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2659 October 12, 1950
In the matter of the testate estate of Emil Maurice Bachrach, deceased.
McDONALD BACHRACH, petitioner-appellee,
vs.
SOPHIE SEIFERT and ELISA ELIANOFF, oppositors-appellants.
Ross, Selph, Carrascoso and Janda for appellants.
Delgado and Flores for appellee.
OZAETA, J.:
Is a stock dividend fruit or income, which belongs to the usufructuary, or is it
or part of the corpus of the estate, which pertains to the remainderman? That
question raised in the appeal.
The deceased E. M. Bachrach, who left no forced heir except his widow Mary
McDonald Bachrach, in his last will and testament made various legacies in c
and willed the remainder of his estate as follows:
Sixth: It is my will and do herewith bequeath and devise to my belo
wife Mary McDonald Bachrach for life all the fruits and usufruct of t
remainder of all my estate after payment of the legacies, bequests,
gifts provided for above; and she may enjoy said usufruct and use
spend such fruits as she may in any manner wish.
The will further provided that upon the death of Mary McDonald Bachrach, on
of the all his estate "shall be divided share and share alike by and between m
heirs, to the exclusion of my brothers."
The estate of E. M. Bachrach, as owner of 108,000 shares of stock of the Ato
Wedge Mining Co., Inc., received from the latter 54,000 shares representing
cent stock dividend on the said 108,000 shares. On June 10, 1948, Mary McD
Bachrach, as usufructuary or life tenant of the estate, petitioned the lower cou
authorize the Peoples Bank and Trust Company as administrator of the estat
M. Bachrach, to her the said 54,000 share of stock dividend by endorsing and
delivering to her the corresponding certificate of stock, claiming that said divid
although paid out in the form of stock, is fruit or income and therefore belong
her as usufructuary or life tenant. Sophie Siefert and Elisa Elianoff, legal heir
deceased, opposed said petition on the ground that the stock dividend in que
was not income but formed part of the capital and therefore belonged not to t
usufructuary but to the remainderman. And they have appealed from the orde
granting the petition and overruling their objection.
While appellants admits that a cash dividend is an income, they contend that
dividend is not, but merely represents an addition to the invested capital. The
called Massachusetts rule, which prevails in certain jurisdictions in the United
supports appellants' contention . It regards cash dividends, however large, as
income, and stock dividends, however made, as capital. (Minot vs. Paine, 99
101; 96 Am. Dec., 705.) It holds that a stock dividend is not in any true sense
true sense any dividend at all since it involves no division or severance from
corporate assets of the dividend; that it does not distribute property but simpl
dilutes the shares as they existed before; and that it takes nothing from the p
of the corporation, and nothing to the interests of the shareholders.
On the other hand, so called Pennsylvania rule, which prevails in various oth
jurisdictions in the United States, supports appellee's contention. This rule de
that all earnings of the corporation made prior to the death of the testator
stockholder belong to the corpus of the estate, and that all earnings, when de
as dividends in whatever form, made during the lifetime of the usufructuary o
tenant. (Earp's Appeal, 28 Pa., 368.)
. . . It is clear that testator intent the remaindermen should have on
corpus of the estate he left in trust, and that all dividends should go
tenants. It is true that profits realized are not dividends until declare
the proper officials of the corporation, but distribution of profits, how
made, in dividends, and the form of the distribution is immaterial. (I
re Thompson's Estate, 262 Pa., 278; 105 Atl. 273, 274.)
In Hite vs. Hite (93 Ky., 257; 20 S. W., 778, 780), the Court of Appeals of Ken
speaking thru its Chief Justice, said:
. . . Where a dividend, although declared in stock, is based upon th
earnings of the company, it is in reality, whether called by one nam
another, the income of the capital invested in it. It is but a mode of
distributing the profit. If it be not income, what is it? If it is, then it is
rightfully and equitably the property of the life tenant. If it be really p
then he should have it, whether paid in stock or money. A stock div
proper is the issue of new shares paid for by the transfer of a sum
their par value from the profits and loss account to that representin
capital stock; and really a corporation has no right to a dividend, ei
cash or stock, except from its earnings; and a singular state of cas
seems to us, an unreasonable one — is presented if the company,
although it rests with it whether it will declare a dividend, can bind t
courts as to the proper ownership of it, and by the mode of paymen
substitute its will for that of that of the testator, and favor the life ten
the remainder-men, as it may desire. It cannot, in reason, be consi
that the testator contemplated such a result. The law regards subs
and not form, and such a rule might result not only in a violation of
testator's intention, but it would give the power to the corporation to
beggar the life tenants, who, in this case, are the wife and children
testator, for the benefit of the remainder-men, who may perhaps be
unknown to the testator, being unborn when the will was executed.
unwilling to adopt a rule which to us seems so arbitrary, and devoid
reason and justice. If the dividend be in fact a profit, although decla
stock, it should be held to be income. It has been so held in Penns
and many other states, and we think it the correct rule. Earp's Appe
Pa. St. 368; Cook, Stocks & S. sec. 554. . . .
We think the Pennsylvania rule is more in accord with our statutory laws than
Massachusetts rule. Under section 16 of our Corporation Law, no corporation
make or declare any dividend except from the surplus profits arising from its
business. Any dividend, therefore, whether cash or stock, represents surplus
Article 471 of the Civil Code provides that the usufructuary shall be entitled to
receive all the natural, industrial, and civil fruits of the property in usufruct. An
articles 474 and 475 provide as follows:
ART. 474. Civil fruits are deemed to accrue day by day, and belong
usufructuary in proportion to the time the usufruct may last.
ART. 475. When a usufruct is created on the right to receive an inc
periodical revenue, either in money or fruits, or the interest on bond
securities payable to bearer, each matured payment shall be consi
as the proceeds or fruits such right.
When it consists of the enjoyment of the benefits arising from an in
in an industrial or commercial enterprise, the profits of which are no
distributed at fixed periods, such profits shall have the same
consideration.lawphil.net
In either case they shall be distributed as civil fruits, and shall be a
in accordance with the rules prescribed by the next preceding artic
The 108,000 shares of stock are part of the property in usufruct. The 54,000
of stock dividend are civil fruits of the original investment. They represent pro
the delivery of the certificate of stock covering said dividend is equivalent to t
payment of said profits. Said shares may be sold independently of the origina
shares, just as the offspring of a domestic animal may be sold independently
mother.
The order appealed from, being in accordance with the above-quoted provisi
the Civil Code, his hereby affirmed, with costs against the appellants.
Moran, C. J., Paras, Feria, Pablo, Bengzon, Tuason, Montemayor and Reyes
concur.
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