01 bachrach v. seifert

9/16/2015 PHILIPPINE REPORTS ANNOTATED VOLUME 087

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[No. L2659. October 12, 1950]

In the matter of the testate estate of Emil MauriceBachrach, deceased. MARY McDONALD BACHRACH,petitioner and appellee, vs. SOPHIE SEIFERT and ELISAELIANOFF, oppositors and appellants.

USUFRUCT; STOCK DIVIDEND CONSIDERED CIVILFRUIT AND BELONGS TO USUFRUCTUARY.—Underthe Massachusetts rule, a stock dividend is consideredpart of the capital and belongs to the remainderman;while under the Pennsylvania rule, all earnings of acorporation, when declared as dividends in whatever form,made during the lifetime of the usufructuary, belong tothe latter.

ID.; ID.—The Pennsylvania rule is more in accord withour statutory laws than the Massachusetts rule. Undersection 16 of our Corporation Law, no corporation maymake or declare any dividend except from the surplusprofits arising from its business. Any dividend, therefore,whether cash or stock, represents surplus profits. Article471 of the Civil Code provides that the usufructuary shallbe entitled to receive all the natural, industrial, and civilfruits of the property in usufruct. The stock dividend inquestion in this case is a civil fruit of the originalinvestment. The shares of stock issued in payment of saiddividend may be sold independently of the original shares,just as the offspring of a domestic animal may be soldindependently of its mother.

APPEAL from an order of the Court of First Instance ofManila. Rodas, J.

The facts are stated in the opinion of the Court.Ross, Selph, Carrascoso & Janda for appellants.Delgado & Flores for appellee.

OZAETA, J.:



Is a stock dividend fruit or income, which belongs to theusufructuary, or is it capital or part of the corpus of the

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484 PHILIPPINE REPORTS ANNOTATEDBachrach vs. Seifert and Elianoff

estate, which pertains to the remainderman? That is thequestion raised in this appeal.

The deceased E. M. Bachrach, who left no forced heirexcept his widow Mary McDonald Bachrach, in his last willand testament made various legacies in cash and willed theremainder of his estate as follows:

"Sixth: It is my will and do herewith bequeath and devise to mybeloved wife Mary McDonald Bachrach for life all the fruits andusufruct of the remainder of all my estate after payment of thelegacies, bequests, and gifts provided for above; and she mayenjoy said usufruct and use or spend such fruits as she may inany manner wish."

The will further provided that upon the death of MaryMcDonald Bachrach, onehalf of all his estate "shall bedivided share and share alike by and between my legalheirs, to the exclusion of my brothers."

The estate of E. M. Bachrach, as owner of 108,000shares of stock of the AtokBig Wedge Mining Co., Inc.,received from the latter 54,000 shares representing 50 percent stock dividend on the said 108,000 shares. On June 10,1948, Mary McDonald Bachrach, as usufructuary or lifetenant of the estate, petitioned the lower court to authorizethe Peoples Bank and Trust Company, as administrator ofthe estate of E. M. Bachrach, to transfer to her the said54,000 shares of stock dividend by indorsing and deliveringto her the corresponding certificate of stock, claiming thatsaid dividend, although paid out in the form of stock, isfruit or income and therefore belonged to her asusufructuary or life tenant. Sophie Siefert and ElisaElianoff, legal heirs of the deceased, opposed said petitionon the ground that the stock dividend in question was notincome but formed part of the capital and thereforebelonged not to the usufructuary but to the remainderman.And they have appealed from the order granting thepetition and overruling their objection.



While appellants admit that a cash dividend is anincome, they contend that a stock dividend is not, butmerely repre

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VOL. 87, OCTOBER 12, 1950 485Bachrach vs. Seifert and Elianoff

sents an addition to the invested capital. The socalledMassachusetts rule, which prevails in certain jurisdictionsin the United States, supports appellants' contention. Itregards cash dividends, however large, as income, andstock dividends, however made, as capital. (Minot vs.Paine, 99 Mass., 101; 96 Am. Dec., 705.) It holds that astock dividend is not in any true sense any dividend at allsince it involves no division or severance from the corporateassets of the subject of the dividend; that it does notdistribute property but simply dilutes the shares as theyexisted before; and that it takes nothing from the propertyof the corporation, and adds nothing to the interests of theshareholders.

On the other hand, the socalled Pennsylvania rule,which prevails in various other jurisdictions in the UnitedStates, supports appellee's contention. This rule declaresthat all earnings of the corporation made prior to the deathof the testator stockholder belong to the corpus of theestate, and that all earnings, when declared as dividends inwhatever form, made during the lifetime of theusufructuary or life tenant are income and belong to theusufructuary or life tenant. (Earp's Appeal, 28 Pa., 368.)

"'* * * It is clear that testator intended the remaindermen shouldhave only the corpus of the estate he left in trust, and that alldividends should go to the life tenants. It is true that profitsrealized are not dividends until declared by the proper officials ofthe corporation, but distribution of profits, however made, isdividends, and the form of the distribution is immaterial." (In reThompson's Estate, 262 Pa., 278; 105 Atl. 273, 274.)

In Hite vs. Hite (93 Ky., 257; 20 S. W., 778, 780), the Courtof Appeals of Kentucky, speaking thru its Chief Justice,said:

"* * * Where a dividend, although declared in stock, is based uponthe earnings of the company, it is in reality, whether called by one



name or another, the income of the capital invested in it. It is buta mode of distributing the profit. If it be not income, what is it? Ifit is, then it is rightfully and equitably the property of the lifetenant. If it be really profit, then he should have it, whether

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486 PHILIPPINE REPORTS ANNOTATEDBachrach vs. Seifert and Elianoff

paid in stock or money. A stock dividend proper is the issue ofnew shares paid for by the transfer of a sum equal to their parvalue from the profit and loss account to that representing capitalstock; and really a corporation has no right to declare a dividend,either in cash or stock, except from its earnings; and a singularstate of case—it seems to us, an unreasonable one—is presented ifthe company, although it rests with it whether it will declare adividend, can bind the courts as to the proper ownership of it, andby the mode of payment substitute its will for that of the testator,and favor the life tenants or the remaindermen, as it may desire.It cannot, in reason, be considered that the testator contemplatedsuch a result. The law regards substance, and not form, and sucha rule might result not only in a violation of the testator'sintention, but it would give the power to the corporation to beggarthe life tenants, who, in this case, are the wife and children of thetestator, for the benefit of the remaindermen, who may perhapsbe unknown to the testator, being unborn when the will wasexecuted. We are unwilling to adopt a rule which to us seems soarbitrary, and devoid of reason and justice. If the dividend be infact a profit, although declared in stock, it should be held to beincome. It has been so held in Pennsylvania and many otherstates, and we think it the correct rule. Earp's Appeal, 28 Pa. St.368; Cook, Stocks & S. sec. 554. * * *"

We think the Pennsylvania rule is more in accord with ourstatutory laws than the Massachusetts rule. Under section16 of our Corporation Law, no corporation may make ordeclare any dividend except f rom the surplus profitsarising from its business. Any dividend, therefore, whethercash or stock, represents surplus profits. Article 471 of theCivil Code provides that the usufructuary shall be entitledto receive all the natural, industrial, and civil fruits of theproperty in usufruct. And articles 474 and 475 provide asfollows:



"ART. 474. Civil fruits are deemed to accrue day by day, andbelong to the usufructuary in proportion to the time the usufructmay last.

"ART. 475. When a usufruct is created on the right to receivean income or periodical revenue, either in money or fruits, or theinterest on bonds or securities payable to bearer, each maturedpayment shall be considered as the proceeds or fruits of suchright.

"When it consists of the enjoyment of the benefits arising froman interest in an industrial or commercial enterprise, the profits

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VOL. 87, OCTOBER 13, 1950 487Gorospe vs. Millan

of which are not distributed at fixed periods, such profits shallhave the same consideration.

"In either case they shall be distributed as civil fruits, andshall be applied in accordance with the rules prescribed by thenext preceding article."

The 108,000 shares of stock are part of the property inusufruct. The 54,000 shares of stock dividend are civilfruits of the original investment They represent profits.and the delivery of the certificate of stock covering' saiddividend is equivalent to the payment of said profits. Saidshares may be sold independently of the original sharesjust as the offspring of a domestic animal may be soldindependently of its mother.

The order appealed from, being in accordance with theabove quoted provisions of the Civil Code, is herebyaffirmed, with costs against the appellants.

Moran, C. J., Parás, Feria. Pablo, Bengzon. Tuason.Montemayor, and Reyes, JJ., concur.

Order affirmed

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01 bachrach v. seifert

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