PROPERTY ACCESSION DISCRETA |1
was not income but formed part of the capital and therefore belonged not to the usufructuary
[No. L-2659. October 12, 1950]
In the matter of the testate estate of Emil Maurice Bachrach, deceased. MARY McDONALD
BACHRACH, petitioner and appellee, vs. SOPHIE SEIFERT and ELISA ELIANOFF, oppositors and
appellants.
1. 1.USUFRUCT; STOCK DIVIDEND CONSIDERED CIVIL FRUIT AND BELONGS TO
USUFRUCTUARY.—Under the Massachusetts rule, a stock dividend is considered part
of the capital and belongs to the remainderman; while under the Pennsylvania rule,
all earnings of a corporation, when declared as dividends in whatever form, made
during the lifetime of the usufructuary, belong to the latter.
1. 2.ID.; ID.—The Pennsylvania rule is more in accord with our statutory laws than the
Massachusetts rule. Under section 16 of our Corporation Law, no corporation may
make or declare any dividend except from the surplus profits arising from its
business. Any dividend, therefore, whether cash or stock, represents surplus profits.
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. The
stock dividend in question in this case is a civil fruit of the original investment. The
shares of stock issued in payment of said dividend may be sold independently of the
original shares, just as the offspring of a domestic animal may be sold independently
of its mother.
APPEAL from an order of the Court of First Instance of Manila. 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 the usufructuary, or is it capital or part of
the corpus of the estate, which pertains to the remainderman? That is the question raised in this
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 cash and willed the remainder
of his estate as follows:
"Sixth: It is my will and do herewith bequeath and devise to my beloved wife Mary McDonald
Bachrach for life all the fruits and usufruct of the remainder of all my estate after payment of
the legacies, bequests, and gifts provided for above; and she may enjoy said usufruct and use
or spend such fruits as she may in any manner wish."
The will further provided that upon the death of Mary McDonald Bachrach, one-half of all his
estate "shall be divided share and share alike by and between my legal heirs, to the exclusion of
my brothers."
The estate of E. M. Bachrach, as owner of 108,000 shares of stock of the Atok-Big Wedge
Mining Co., Inc., received from the latter 54,000 shares representing 50 per cent stock dividend
on the said 108,000 shares. On June 10, 1948, Mary McDonald Bachrach, as usufructuary or life
tenant of the estate, petitioned the lower court to authorize the Peoples Bank and Trust
Company, as administrator of the estate of E. M. Bachrach, to transfer to her the said 54,000
shares of stock dividend by indorsing and delivering to her the corresponding certificate of
stock, claiming that said dividend, although paid out in the form of stock, is fruit or income and
therefore belonged to her as usufructuary or life tenant. Sophie Siefert and Elisa Elianoff, legal
heirs of the deceased, opposed said petition on the ground that the stock dividend in question
but to the remainderman. And they have appealed from the order granting the petition and
overruling their objection.
While appellants admit that a cash dividend is an income, they contend that a stock
dividend is not, but merely represents an addition to the invested capital. The so-called
Massachusetts rule, which prevails in certain jurisdictions in the United States, supports
appellants' contention. It regards cash dividends, however large, as income, and stock
dividends, however made, as capital. (Minot vs. Paine, 99 Mass., 101; 96 Am. Dec., 705.) It
holds that a stock dividend is not in any true sense any dividend at all since it involves no
division or severance from the corporate assets of the subject of the dividend; that it does not
distribute property but simply dilutes the shares as they existed before; and that it takes nothing
from the property of the corporation, and adds nothing to the interests of the shareholders.
On the other hand, the so-called Pennsylvania rule, which prevails in various other
jurisdictions in the United States, supports appellee's contention. This 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 in whatever form, made
during the lifetime of the usufructuary or life tenant are income and belong to the usufructuary
or life tenant. (Earp's Appeal, 28 Pa., 368.)
"'* * * It is clear that testator intended the remaindermen should have only the corpus of the
estate he left in trust, and that all dividends should go to the life tenants. It is true that profits
realized are not dividends until declared by the proper officials of the corporation, but
distribution of profits, however made, is dividends, and the form of the distribution is
immaterial." (In 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 Kentucky, speaking
thru its Chief Justice, said:
"* * * Where a dividend, although declared in stock, is based upon the 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 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 profit, then he
should have it, whether paid in stock or money. A stock dividend proper is the issue of new
shares paid for by the transfer of a sum equal to their par value from the profit and loss account
to that representing capital stock; and really a corporation has no right to declare a dividend,
either in cash or stock, except from its earnings; and a singular state of case—it seems to us, an
unreasonable one—is presented if the company, although it rests with it whether it will declare a
dividend, can bind the courts as to the proper ownership of it, and by the mode of payment
substitute its will for that of the testator, and favor the life tenants or the remainder-men, as it
may desire. It cannot, in reason, be considered that the testator contemplated such a result.
The law regards substance, and not form, and such a rule might result not only in a violation of
the 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 of the testator, for the benefit of the
remainder-men, who may perhaps be unknown to the testator, being unborn when the will was
executed. We are unwilling to adopt a rule which to us seems so arbitrary, and devoid of reason
and justice. If the dividend be in fact a profit, although declared in stock, it should be held to be
income. It has been so held in Pennsylvania and many other states, 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 our statutory laws than the Massachusetts
rule. Under section 16 of our Corporation Law, no corporation may make or
declare any dividend except f rom the surplus profits arising from its business. Any dividend,
therefore, whether cash or stock, represents surplus profits. 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. And articles 474 and 475 provide as follows:
 PROPERTY ACCESSION DISCRETA |2
"ART. 474. Civil fruits are deemed to accrue day by day, and belong to the usufructuary in
proportion to the time the usufruct may last.
"ART. 475. When a usufruct is created on the right to receive an income or periodical
revenue, either in money or fruits, or the interest on bonds or securities payable to bearer, each
matured payment shall be considered as the proceeds or fruits of such right.
"When it consists of the enjoyment of the benefits arising from an interest in an industrial
or commercial enterprise, the profits of which are not distributed at fixed periods, such profits
shall have the same consideration.

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

The 108,000 shares of stock are part of the property in usufruct. The 54,000 shares of stock
dividend are civil fruits of the original investment They represent profits. and the delivery of the
certificate of stock covering' said dividend is equivalent to the payment of said profits. Said
shares may be sold independently of the original shares just as the offspring of a domestic
animal may be sold independently of its mother.
The order appealed from, being in accordance with the above- quoted provisions of the Civil
Code, is hereby affirmed, with costs against the appellants.
Moran, C. J., Parás, Feria. Pablo, Bengzon. Tuason. Montemayor, and Reyes,
JJ., concur.

Order affirmed

_______________

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 PROPERTY ACCESSION DISCRETA |3
[No. 35223. September 17, 1931]
THE BACHRACH MOTOR Co., INC., plaintiff and appellee, vs. TALISAY-SILAY MILLING Co. ET
AL., defendants and appellees. THE PHILIPPINE NATIONAL BANK, intervenor and appellant.
1. 1.REAL PROPERTY; CIVIL FRUITS.—The bonus which the Talisay-Silay Milling Co.,
Inc., had 'to pay the planters who had mortgaged their lands to the Philippine
Nataional Bank in order to- secure the payment of the company's debt to the bank,
is not a civil fruit of the mortgaged property.
1. 2.ID.; ID.—Article 355 of the Civil Code considers three things as civil fruits; (1) rents
from. buildings, (2) proceeds from leases of lands, and (3) the income from
perpetual or life annuities or similar sources of revenue. The phrase "u otras
análogas" used (in the original Spanish, art. 355, last paragraph, Civil Code) in the
following context: "Y el importe de las rentas perpetuas, vitalicias u otras
análogas," refers to "rentas," for the adjectives "otras" and "análogas" agree with
the noun '"rentas," as do also the other adjectives "perpetuas" and "vitalicias."
APPEAL from a judgment of the Court of First Instance of Iloilo. Barrios, J.
The f acts are stated in the opinion of the court.
Roman J. Lacson for intervenor-appellant.
Mariano Ezpeleta for plaintiff-appellee.
Nolan & Hernaez for defendants-appellees Talisay-Silay Milling Co. and Cesar Ledesma.
ROMUALDEZ, J.:
This proceeding originated in a complaint filed by the Bachrach Motor Co., Inc., against the
Talisay-Silay Milling Co., Inc., for the delivery of the amount of P13,850 or promissory notes or
other instruments of credit for that sum payable on June 30, 1930, as bonus in favor of Mariano
Lacson Ledesma; the complaint f urther prays that the sugar central be ordered to render an
accounting of the amounts it owes Mariano Lacson Ledesma by way of bonus, dividends, or
otherwise, and to pay the plaintiff a sum sufficient to satisfy the judgment mentioned in the
complaint, and that the sale made by said Mariano Lacson Ledesma be declared null and void.
The Philippine National Bank filed a third party claim alleging a preferential right to receive
any amount which Mariano Lacson Ledesma might be entitled to from the Talisay-Silay Milling
Co. as bonus, because that would be civil -fruits of the land mortgaged to said bank by said
debtor for the benefit of the central referred to, and by virtue of a deed of assignment, and
praying that said central be ordered to deliver directly to the intervening bank said sum on
account of the latter's credit against the aforesaid Mariano Lacson Ledesma.
The corporation Talisay-Silay Milling Co., Inc., answered the complaint stating that of
Mariano Lacson Ledesma's credit, P7,500 belonged to Cesar Ledesma because he had
purchased it, and praying that it be absolved from the complaint and that the proper party be
named so that the remainder might be delivered.
Cesar Ledesma, in turn, claiming to be the owner by purchase in good faith and for a
consideration of the P7,500 which is a part of the credit referred to above, answered praying
that he be absolved from the complaint.
The plaintiff Bachrach Motor Co., Inc., answered the third party claim alleging that its credit
against Mariano Lacson Ledesma was prior and pref erential to that of the intervening bank, and
praying that the latter's complaint be dismissed.
At the trial all the parties agreed to recognize and respect the sale made in f avor of Cesar
Ledesma of the P7,500 part of the credit in question, for which reason the trial court dismissed
the complaint and cross-complaint against Cesar Ledesma authorizing the def endant central to
deliver to him the aforementioned sum of P7,500. And upon conclusion of the hearing, the court
held that the Bachrach Motor Co., Inc., had a preferred right to receive the amount of
P11,076.02 which was Mariano Lacson Ledesma's bonus, and it ordered the defendant central to
deliver said sum to the plaintiff.
The Philippine National Bank appeals, assigning the following alleged errors as committed
by the trial court:
1. "1.In holding that the bonus which the Talisay-Silay Milling Co., Inc., bound itself to
pay the planters who had mortgaged their land to the Philippine National Bank to
secure the payment of the debt of said central to said bank is not civil fruits of said
land.
2. "2.In not holding that said bonus became subject to the mortgage executed by the
defendant Mariano Lacson Ledesma to the Philippine National Bank to secure the
payment of his personal debt to said bank when it f ell due.
3. "3.In holding that the assignment (Exhibit 9, P. N. B.) of said bonus made on March 7,
1930, by Mariano Lacson Ledesma to the Philippine National Bank to be applied to
the payment of his debt to said Philippine National Bank is fraudulent.
4. "4.In holding that the Bachrach Motor Co., Inc., in civil case No. 31597 of the Court of
First Instance of Manila levied a valid attachment upon the bonus in question.
5. "5.In admitting and considering the supplementary com-plaint filed by the Bachrach
Motor Co., Inc., alleging as a cause of action the attachment of the bonus in
question which said Bachrach Motor Co., Inc., in civil case No. 31821 of the Court of
First Instance of Manila levied after the 'filing of the original complaint in this case,
and after Mariano Lacson Ledesma in this case had been declared in default.
1. "6.In holding that the Bachrach Motor Co., Inc., has a preferential right to receive
from the Talisay-Silay Milling Co., Inc., the amount of P11,076.02 which is in the
possession of said corporation as the bonus to be paid to Mariano Lacson Ledesma,
and in ordering the Talisay-Silay Milling Co., Inc., to deliver said amount to the
Bachrach Motor Go., Inc.
2. "7.In not holding that the Philippine National Bank has a preferential right to receive
from the Talisay-Silay Milling Co., Inc., the amount of P11,076.02 held by said
corporation as Mariano Lacson Ledesma's bonus, and in not ordering said Talisay-
Silay Milling Co., Inc., to deliver said amount to the Philippine National Bank.
3. "8.In not holding that the amended complaint and the supplementary complaint of the
Bachrach Motor Co., Inc., do not state facts sufficient to constitute a cause of action
in favor of the .Bachrach Motor Co., Inc., and against the Talisay-Silay Milling Co.,
Inc., or against the Philippine National Bank."
The appellant bank bases its preferential right upon the contention that the bonus in question is
civil fruits of the land which the owners had mortgaged for the benefit of the central giving the
bonus, and that, as civil fruits of said land, said bonus was assigned by Mariano Lacson Ledesma
on March 7, 1930, by virtue of the document Exhibit 9 of said intervening institution, which
admitted in its brief that "if the bonus in question is not civil fruits or rent which became subject
to the mortgage in favor of the Philippine National Bank when Mariano Lacson Ledesma's
personal obligation fell due, the assignment of March 7, 1930 (Exhibit 9, P. N. B.), is null and
void, not because it is fraudulent, for there was no intent of fraud in executing the deed, but
that the cause or consideration of the assignment was erroneous, for it was based upon the
proposition that the bonus was civil fruits of the land mortgaged to the Philippine National
Bank." (P. 31.)
The fundamental question, then, submitted to our consideration is whether or not the
bonus in question is civil fruits.
 PROPERTY ACCESSION DISCRETA |4
This is how that bonus came to be granted: On December 22, 1923, the Talisay-Silay Milling
Co., Inc., was indebted to the Philippine National Bank. To secure the payment of its debt, it
succeeded in inducing its planters, among whom was Mariano Lacson Ledesma, to mortgage
their land to the creditor bank. And in order to compensate those planters for the risk they were
running with their property under that mortgage, the aforesaid central, by a a resolution passed
on that same date, i. e., December 22, 1923, and amended on March 23, 1928, undertook to
credit the owners of the plantation thus mortgaged every year with a sum equal to two per
centum of the debt secured according to the yearly balance, the payment of the bonus being
made at once, or in part f rom time to time, as soon as the central became free of its obligations
to the aforesaid bank, and of those contracted by virtue of the contract of supervision, and had
funds which might be so used, or as soon as it obtained from said bank authority to make such
payment. (Exhibits 5, 6; P. N. B.)
Article 355 of the Civil Code considers three things as civil fruits: First, the rents of
buildings; second, the proceeds from leases of lands; and, third, the income from perpetual or
life annuities, or other similar sources of revenue. It may be noted that according to the context
of the law, the phrase "u otras análogas" refers only to rents or income, for the
adjectives "otras" and "análogas" agree with the noun "rentas," as do also the other
adjectives "perpetuas" and "vitalicias." That is why we say that by "civil fruits" the Civil Code
understands one of three and only three things, to wit: the rent of a building, the rent of land,
and certain kinds of income.
As the bonus in question is not the rent of a building  or of land, the only meaning of "civil
fruits" left to be examined is that of "income."
Assuming that in the broad juridical sense of the word "income" it might be said that the
bonus in question is "income" under article 355 of the Civil Code, it is obvious to inquire whether
it is derived from the land mortgaged by Mariano Lacson Ledesma to the appellant bank for the
benefit of the central; f or if it is not obtained f rom that land but from something else, it is not
civil fruits of that land, and the bank's contention is untenable.
It is to be noted that the said bonus bears no immediate, but only a remote and accidental
relation to the land mentioned, having been granted as compensation for the risk of having
subjected one's land to a lien in favor of the bank, for the benefit of the entity granting said
bonus. If this bonus be income or civil fruits of anything, it is income arising f rom said risk, or,
if one chooses, from Mariano Lacson Ledesma's generosity in facing the danger for the
protection of the central, but certainly it is not civil fruits or income from the mortgaged
property, which, as far as this case is concerned, has nothing to do with it. Hence, the amount
of the bonus, according to the resolution of the central granting it, is not based upon the value,
importance or any other circumstance of the mortgaged property, but upon the total value of
the debt thereby secured, according to the annual balance, which is something quite distinct
from and independent of the property referred to.
Finding no merit in this appeal, the judgment appealed from is affirmed, without express
finding as to costs. So ordered.
Johnson, Street, Malcolm, Villamor, Ostrand, Villa-Real, and Imperial, JJ., concur.

Judgment affirmed.
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