Also, two US rulings figured in this case:
1. Massachusetts rule = stock dividend is not an income but merely represents an addition to theinvestment capital
The Massachusetts rule regards cash dividends, however large, as income, and stockdividends, however made, as capital. It holds that a stock dividend is not in any true sense any dividend at allsince it involves no division or severance from the corporate assets of the subject of the dividend.
This rulesupports Seifert and Elianoff’s contention that a stock dividend is not an income (unlike a cashdividend), but merely represents an addition to the invested capital.2. The Pennsylvania rule
declares 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 declared as dividends inwhatever form, made during the lifetime of the usufructuary or life tenant are income and belong tothe usufructuary or life tenant.
This rule supports Mary Bachrach's contention.According to our SC,
the Pennsylvania rule is more in accord with Philippine statutory laws than theMassachusetts rule since under section 16 of the Corporation Law, no corporation may make or declare anydividend except from the surplus profits arising from its business. Any dividend, therefore, whether cash or stock,represents surplus profits. Therefore, the stock dividend, as part of the income of the usufruct, should betransferred to Mary since Article 471 of the Civil Code (now Art. 566)provides that the usufructuary shall beentitled to receive all the natural, industrial, and civil fruits of the property in usufruct.
In My Understanding:
The widow is saying that the stock dividend should be transferred to her account sincethis form part of the income of the estate and since she is the usufructuary, she has the right over such income.On the other hand, the legal heirs/ remainderman (or men) are contending that the stock dividend is part of thecapital and should be delivered to them (together with the rest of the estate upon Mary’s death). The court held that stock dividends form part of the income and therefore, should be delivered to the usufructuary (the widow).
BACHRACH v TALISAY SILAY
Bachrach Motor Co., Inc.
Talisay-Silay Milling Co. et al.
Philippine National Bank
22 Dec 1923, Talisay-Silay was indebted to PNB. To secure the loan, Talisay induced its planters one of whomwas Mariano Lacson Ledesma to mortgage their land. The central, to compensate the planters for mortgagingtheir property,
undertook to credit the owners of the plantation… every year with a sum equal to 2% of thedebt secured accdg to the yearly balance
. The payment to be made as soon as the central was freed of itsdebts
Mariano sold his land to Cesar Ledesma for P7500
Bachrach on the other hand was a creditor of Mariano Ledesma. When Mariano could no longer pay Bachrach,it went after Talisay (original complaint), praying for the delivery of P13850 Talisay owed to Mariano as bonusstated in the first paragraph, or any instrument of credit. It also prayed for accounting of whatever the centralowed to Mariano by way of bonus, dividend, etc., as well as the nullification of the sale made to CesarLedesma
PNB filed third party claim alleging a preferential right over Mariano’s credit owed by Talisay
as part of thecivil fruits of the land mortgaged
to the bank. BAchrach contested this
Talisay prayed for the absolution of 7500 of the credit as it belonged to Cesar Ledesma as buyer in good faith.All parties later agreed to respect Cesar’s credit and absolved him from the complaint and ordered delivery tohim of P7500
Trial court ruled in favor of Bachrach, awarding it P11,076.02 of Mariano’s bonus from Talisay. Hence thisappeal
W/N the bonus was a civil fruit which formed part of the mortgaged land – NO
Held and Ratio:
NO. Art 355 of the old Civil Code (Art 442 of the current Civil Code) considers three things ascivil fruits: rents of buildings, proceeds from leases of lands, and income from perpetual of life annuities or othersimilar sources of revenue. The bonus in question was neither rent of a building nor land. For it to come under the coverage of income, it must be obtained from the land. In this case however,
[the] bonus bears no immediate but only aremote and accidental relation to the land
. The central granted it as compensation for the risk that thelandowners entered in mortgaging their lands. If the bonus was an income of any kind, it comes from theassumption of risk, and not from the land itself. Thus, it is distinct and independent from the property referred toin the mortgage to the bank.