USUFRUCT

Arts. 565, 601, 605

FIRST DIVISION
[G.R. No. 148830. April 13, 2005]
NATIONAL HOUSING AUTHORITY, petitioner, vs. COURT OF APPEALS, BULACAN GARDEN
CORPORATION and MANILA SEEDLING BANK FOUNDATION, INC., respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review[1] seeking to set aside the Decision[2] dated 30 March 2001 of the Court of
Appeals (appellate court) in CA-G.R. CV No. 48382, as well as its Resolution dated 25 June 2001
denying the motion for reconsideration. The appellate court reversed the Decision[3] of Branch 87 of the
Regional Trial Court of Quezon City (trial court) dated 8 March 1994 in Civil Case No. Q-53464. The
trial court dismissed the complaint for injunction filed by Bulacan Garden Corporation (BGC) against
the National Housing Authority (NHA). BGC wanted to enjoin the NHA from demolishing BGCs
facilities on a lot leased from Manila Seedling Bank Foundation, Inc. (MSBF). MSBF allegedly has
usufructuary rights over the lot leased to BGC.
Antecedent Facts
On 24 October 1968, Proclamation No. 481 issued by then President Ferdinand Marcos set aside a 120hectare portion of land in Quezon City owned by the NHA[4] as reserved property for the site of the
National Government Center (NGC). On 19 September 1977, President Marcos issued Proclamation No.
1670, which removed a seven-hectare portion from the coverage of the NGC. Proclamation No. 1670
gave MSBF usufructuary rights over this segregated portion, as follows:
Pursuant to the powers vested in me by the Constitution and the laws of the Philippines, I,
FERDINAND E. MARCOS, President of the Republic of the Philippines, do hereby exclude from the
operation of Proclamation No. 481, dated October 24, 1968, which established the National Government
Center Site, certain parcels of land embraced therein and reserving the same for the Manila Seedling
Bank Foundation, Inc., for use in its operation and projects, subject to private rights if any there be, and
to future survey, under the administration of the Foundation.
This parcel of land, which shall embrace 7 hectares, shall be determined by the future survey based
on the technical descriptions found in Proclamation No. 481, and most particularly on the original
survey of the area, dated July 1910 to June 1911, and on the subdivision survey dated April 19-25, 1968.
(Emphasis added)

MSBF occupied the area granted by Proclamation No. 1670. Over the years, MSBFs occupancy
exceeded the seven-hectare area subject to its usufructuary rights. By 1987, MSBF occupied
approximately 16 hectares. By then the land occupied by MSBF was bounded by Epifanio de los Santos
Avenue (EDSA) to the west, Agham Road to the east, Quezon Avenue to the south and a creek to the
north.
On 18 August 1987, MSBF leased a portion of the area it occupied to BGC and other stallholders. BGC
leased the portion facing EDSA, which occupies 4,590 square meters of the 16-hectare area.
On 11 November 1987, President Corazon Aquino issued Memorandum Order No. 127 (MO 127) which
revoked the reserved status of the 50 hectares, more or less, remaining out of the 120 hectares of the
NHA property reserved as site of the National Government Center. MO 127 also authorized the NHA to
commercialize the area and to sell it to the public.
On 15 August 1988, acting on the power granted under MO 127, the NHA gave BGC ten days to vacate
its occupied area. Any structure left behind after the expiration of the ten-day period will be demolished
by NHA.
BGC then filed a complaint for injunction on 21 April 1988 before the trial court. On 26 May 1988,
BGC amended its complaint to include MSBF as its co-plaintiff.
The Trial Courts Ruling
The trial court agreed with BGC and MSBF that Proclamation No. 1670 gave MSBF the right to conduct
the survey, which would establish the seven-hectare area covered by MSBFs usufructuary rights.
However, the trial court held that MSBF failed to act seasonably on this right to conduct the survey. The
trial court ruled that the previous surveys conducted by MSBF covered 16 hectares, and were thus
inappropriate to determine the seven-hectare area. The trial court concluded that to allow MSBF to
determine the seven-hectare area now would be grossly unfair to the grantor of the usufruct.
On 8 March 1994, the trial court dismissed BGCs complaint for injunction. Thus:
Premises considered, the complaint praying to enjoin the National Housing Authority from carrying out
the demolition of the plaintiffs structure, improvements and facilities in the premises in question is
hereby DISMISSED, but the suggestion for the Court to rule that Memorandum Order 127 has repealed
Proclamation No. 1670 is DENIED. No costs.
SO ORDERED.[5]
The NHA demolished BGCs facilities soon thereafter.
The Appellate Courts Ruling
Not content with the trial courts ruling, BGC appealed the trial courts Decision to the appellate court.
Initially, the appellate court agreed with the trial court that Proclamation No. 1670 granted MSBF the
right to determine the location of the seven-hectare area covered by its usufructuary rights. However, the

appellate court ruled that MSBF did in fact assert this right by conducting two surveys and erecting its
main structures in the area of its choice.
On 30 March 2001, the appellate court reversed the trial courts ruling. Thus:
WHEREFORE, premises considered, the Decision dated March 8, 1994 of the Regional Trial Court of
Quezon City, Branch 87, is hereby REVERSED and SET ASIDE. The National Housing Authority is
enjoined from demolishing the structures, facilities and improvements of the plaintiff-appellant Bulacan
Garden Corporation at its leased premises located in Quezon City which premises were covered by
Proclamation No. 1670, during the existence of the contract of lease it (Bulacan Garden) had entered
with the plaintiff-appellant Manila Seedling Bank Foundation, Inc.
No costs.
SO ORDERED.[6]
The NHA filed a motion for reconsideration, which was denied by the appellate court on 25 June 2001.
Hence, this petition.
The Issues
The following issues are considered by this Court for resolution:
WHETHER THE PETITION IS NOW MOOT BECAUSE OF THE DEMOLITION OF THE
STRUCTURES OF BGC; and
WHETHER THE PREMISES LEASED BY BGC FROM MSBF IS WITHIN THE SEVENHECTARE AREA THAT PROCLAMATION NO. 1670 GRANTED TO MSBF BY WAY OF
USUFRUCT.
The Ruling of the Court
We remand this petition to the trial court for a joint survey to determine finally the metes and bounds of
the seven-hectare area subject to MSBFs usufructuary rights.
Whether the Petition is Moot because of the
Demolition of BGCs Facilities
BGC claims that the issue is now moot due to NHAs demolition of BGCs facilities after the trial court
dismissed BGCs complaint for injunction. BGC argues that there is nothing more to enjoin and that
there are no longer any rights left for adjudication.
We disagree.

BGC may have lost interest in this case due to the demolition of its premises, but its co-plaintiff, MSBF,
has not. The issue for resolution has a direct effect on MSBFs usufructuary rights. There is yet the
central question of the exact location of the seven-hectare area granted by Proclamation No. 1670 to
MSBF. This issue is squarely raised in this petition. There is a need to settle this issue to forestall future
disputes and to put this 20-year litigation to rest.
On the Location of the Seven-Hectare Area Granted by
Proclamation No. 1670 to MSBF as Usufructuary
Rule 45 of the 1997 Rules of Civil Procedure limits the jurisdiction of this Court to the review of errors
of law.[7] Absent any of the established grounds for exception,[8] this Court will not disturb findings of
fact of lower courts. Though the matter raised in this petition is factual, it deserves resolution because
the findings of the trial court and the appellate court conflict on several points.
The entire area bounded by Agham Road to the east, EDSA to the west, Quezon Avenue to the south
and by a creek to the north measures approximately 16 hectares. Proclamation No. 1670 gave MSBF a
usufruct over only a seven-hectare area. The BGCs leased portion is located along EDSA.
A usufruct may be constituted for a specified term and under such conditions as the parties may deem
convenient subject to the legal provisions on usufruct.[9] A usufructuary may lease the object held in
usufruct.[10] Thus, the NHA may not evict BGC if the 4,590 square meter portion MSBF leased to BGC
is within the seven-hectare area held in usufruct by MSBF. The owner of the property must respect the
lease entered into by the usufructuary so long as the usufruct exists.[11] However, the NHA has the right
to evict BGC if BGC occupied a portion outside of the seven-hectare area covered by MSBFs
usufructuary rights.
MSBFs survey shows that BGCs stall is within the seven-hectare area. On the other hand, NHAs survey
shows otherwise. The entire controversy revolves on the question of whose land survey should prevail.
MSBFs survey plots the location of the seven-hectare portion by starting its measurement from Quezon
Avenue going northward along EDSA up until the creek, which serves as the northern boundary of the
land in question. Mr. Ben Malto (Malto), surveyor for MSBF, based his survey method on the fact that
MSBFs main facilities are located within this area.
On the other hand, NHAs survey determines the seven-hectare portion by starting its measurement from
Quezon Avenue going towards Agham Road. Mr. Rogelio Inobaya (Inobaya), surveyor for NHA, based
his survey method on the fact that he saw MSBFs gate fronting Agham Road.
BGC presented the testimony of Mr. Lucito M. Bertol (Bertol), General Manager of MSBF. Bertol
presented a map,[12] which detailed the area presently occupied by MSBF. The map had a yellowshaded portion, which was supposed to indicate the seven-hectare area. It was clear from both the map
and Bertols testimony that MSBF knew that it had occupied an area in excess of the seven-hectare area
granted by Proclamation No. 1670.[13] Upon cross-examination, Bertol admitted that he personally did
not know the exact boundaries of the seven-hectare area.[14] Bertol also admitted that MSBF prepared
the map without consulting NHA, the owner of the property.[15]

BGC also presented the testimony of Malto, a registered forester and the Assistant Vice-President of
Planning, Research and Marketing of MSBF. Malto testified that he conducted the land survey, which
was used to construct the map presented by Bertol.[16] Bertol clarified that he authorized two surveys,
one in 1984 when he first joined MSBF, and the other in 1986.[17] In both instances, Mr. Malto testified
that he was asked to survey a total of 16 hectares, not just seven hectares. Malto testified that he
conducted the second survey in 1986 on the instruction of MSBFs general manager. According to Malto,
it was only in the second survey that he was told to determine the seven-hectare portion. Malto further
clarified that he based the technical descriptions of both surveys on a previously existing survey of the
property.[18]
The NHA presented the testimony of Inobaya, a geodetic engineer employed by the NHA. Inobaya
testified that as part of the NHAs Survey Division, his duties included conducting surveys of properties
administered by the NHA.[19] Inobaya conducted his survey in May 1988 to determine whether BGC
was occupying an area outside the seven-hectare area MSBF held in usufruct.[20] Inobaya surveyed the
area occupied by MSBF following the same technical descriptions used by Malto. Inobaya also came to
the same conclusion that the area occupied by MSBF, as indicated by the boundaries in the technical
descriptions, covered a total of 16 hectares. He further testified that the seven-hectare portion in the map
presented by BGC,[21] which was constructed by Malto, does not tally with the boundaries BGC and
MSBF indicated in their complaint.
Article 565 of the Civil Code states:
ART. 565. The rights and obligations of the usufructuary shall be those provided in the title constituting
the usufruct; in default of such title, or in case it is deficient, the provisions contained in the two
following Chapters shall be observed.
In the present case, Proclamation No. 1670 is the title constituting the usufruct. Proclamation No. 1670
categorically states that the seven-hectare area shall be determined by future survey under the
administration of the Foundation subject to private rights if there be any. The appellate court and the
trial court agree that MSBF has the latitude to determine the location of its seven-hectare usufruct
portion within the 16-hectare area. The appellate court and the trial court disagree, however, whether
MSBF seasonably exercised this right.
It is clear that MSBF conducted at least two surveys. Although both surveys covered a total of 16
hectares, the second survey specifically indicated a seven-hectare area shaded in yellow. MSBF made
the first survey in 1984 and the second in 1986, way before the present controversy started. MSBF
conducted the two surveys before the lease to BGC. The trial court ruled that MSBF did not act
seasonably in exercising its right to conduct the survey. Confronted with evidence that MSBF did in fact
conduct two surveys, the trial court dismissed the two surveys as self-serving. This is clearly an error on
the part of the trial court. Proclamation No. 1670 authorized MSBF to determine the location of the
seven-hectare area. This authority, coupled with the fact that Proclamation No. 1670 did not state the
location of the seven-hectare area, leaves no room for doubt that Proclamation No. 1670 left it to MSBF
to choose the location of the seven-hectare area under its usufruct.
More evidence supports MSBFs stand on the location of the seven-hectare area. The main structures of
MSBF are found in the area indicated by MSBFs survey. These structures are the main office, the three

green houses, the warehouse and the composting area. On the other hand, the NHAs delineation of the
seven-hectare area would cover only the four hardening bays and the display area. It is easy to
distinguish between these two groups of structures. The first group covers buildings and facilities that
MSBF needs for its operations. MSBF built these structures before the present controversy started. The
second group covers facilities less essential to MSBFs existence. This distinction is decisive as to which
survey should prevail. It is clear that the MSBF intended to use the yellow-shaded area primarily
because it erected its main structures there.
Inobaya testified that his main consideration in using Agham Road as the starting point for his survey
was the presence of a gate there. The location of the gate is not a sufficient basis to determine the
starting point. MSBFs right as a usufructuary as granted by Proclamation No. 1670 should rest on
something more substantial than where MSBF chose to place a gate.
To prefer the NHAs survey to MSBFs survey will strip MSBF of most of its main facilities. Only the
main building of MSBF will remain with MSBF since the main building is near the corner of EDSA and
Quezon Avenue. The rest of MSBFs main facilities will be outside the seven-hectare area.
On the other hand, this Court cannot countenance MSBFs act of exceeding the seven-hectare portion
granted to it by Proclamation No. 1670. A usufruct is not simply about rights and privileges. A
usufructuary has the duty to protect the owners interests. One such duty is found in Article 601 of the
Civil Code which states:
ART. 601. The usufructuary shall be obliged to notify the owner of any act of a third person, of which
he may have knowledge, that may be prejudicial to the rights of ownership, and he shall be liable should
he not do so, for damages, as if they had been caused through his own fault.
A usufruct gives a right to enjoy the property of another with the obligation of preserving its form and
substance, unless the title constituting it or the law otherwise provides.[22] This controversy would not
have arisen had MSBF respected the limit of the beneficial use given to it. MSBFs encroachment of its
benefactors property gave birth to the confusion that attended this case. To put this matter entirely to
rest, it is not enough to remind the NHA to respect MSBFs choice of the location of its seven-hectare
area. MSBF, for its part, must vacate the area that is not part of its usufruct. MSBFs rights begin and end
within the seven-hectare portion of its usufruct. This Court agrees with the trial court that MSBF has
abused the privilege given it under Proclamation No. 1670. The direct corollary of enforcing MSBFs
rights within the seven-hectare area is the negation of any of MSBFs acts beyond it.
The seven-hectare portion of MSBF is no longer easily determinable considering the varied structures
erected within and surrounding the area. Both parties advance different reasons why their own surveys
should be preferred. At this point, the determination of the seven-hectare portion cannot be made to rely
on a choice between the NHAs and MSBFs survey. There is a need for a new survey, one conducted
jointly by the NHA and MSBF, to remove all doubts on the exact location of the seven-hectare area and
thus avoid future controversies. This new survey should consider existing structures of MSBF. It should
as much as possible include all of the facilities of MSBF within the seven-hectare portion without
sacrificing contiguity.
A final point. Article 605 of the Civil Code states:

ART. 605. Usufruct cannot be constituted in favor of a town, corporation, or association for more
than fifty years. If it has been constituted, and before the expiration of such period the town is
abandoned, or the corporation or association is dissolved, the usufruct shall be extinguished by reason
thereof. (Emphasis added)
The law clearly limits any usufruct constituted in favor of a corporation or association to 50 years. A
usufruct is meant only as a lifetime grant. Unlike a natural person, a corporation or associations lifetime
may be extended indefinitely. The usufruct would then be perpetual. This is especially invidious in cases
where the usufruct given to a corporation or association covers public land. Proclamation No. 1670 was
issued 19 September 1977, or 28 years ago. Hence, under Article 605, the usufruct in favor of MSBF has
22 years left.
MO 127 released approximately 50 hectares of the NHA property as reserved site for the National
Government Center. However, MO 127 does not affect MSBFs seven-hectare area since under
Proclamation No. 1670, MSBFs seven-hectare area was already exclude[d] from the operation of
Proclamation No. 481, dated October 24, 1968, which established the National Government Center Site.
WHEREFORE, the Decision of the Court of Appeals dated 30 March 2001 and its Resolution dated 25
June 2001 in CA-G.R. CV No. 48382 are SET ASIDE. This case is REMANDED to Branch 87 of the
Regional Trial Court of Quezon City, which shall order a joint survey by the National Housing
Authority and Manila Seedling Bank Foundation, Inc. to determine the metes and bounds of the sevenhectare portion of Manila Seedling Bank Foundation, Inc. under Proclamation No. 1670. The sevenhectare portion shall be contiguous and shall include as much as possible all existing major
improvements of Manila Seedling Bank Foundation, Inc. The parties shall submit the joint survey to the
Regional Trial Court for its approval within sixty days from the date ordering the joint survey.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.

Art. 566
Republic of the Philippines
SUPREME COURT
Manila

EN BANC
G.R. No. L-1592

September 20, 1949

In the estate of E.M. Bachrach, deceased. MARY MCDONALD BACHRACH, petitioner-appellee,

vs.
SOPHIE M. SEIFERT, ELISA ELIANOFF, AND THE HEIRS OF THE DECEASED GINDA M.
SKUNDINA, oppositors-appellants.
Ross, Selph. Carrascoso and Janda for appellants.
Delgado, Dizon and Flores for appellee.
MONTEMAYOR, J.:
In testate proceedings, civil case No. 51955 of the Court of First Instance of Manila, the will of E. M.
Bachrach, who died on September 28, 1937, provided for the distribution of the considerable property
which he had left. The provisions of the will which are important in this case are contained in the sixth
and eighth paragraphs which read 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 such usufruct and use or
spend such fruits as she may in any manner wish.
Eighth: It is my wish that upon the death of my beloved wife, Mary McDonald Bachrach, all my
estate, personal, real and otherwise, and all the fruits and usufruct thereof which during her life
pertained to her, shall be divided as follows:
One-half thereof shall be given to such charitable hospitals in the Philippines as she may
designate; in case she fails to designate, then said sum shall be given to the Chief Executive of
these Islands who shall distribute it, share and share alike to all charitable hospitals in the
Philippines excluding those belonging to the governments of the Philippines or of the United
States;
One-half thereof shall be divided, share and share alike by and between my legal heirs, to the
exclusion of my brothers.
The widow Mary McDonald Bachrach as administratrix and executrix had been administering the
property left by her deceased husband and enjoying the usufruct thereof. The other heirs Sophie M.
Seifert, Ginda M. Skundina, Elisa Elianoff and Annie Bachrach Levine on September 14, 1940, filed a

petition, agreed to by usufructuary Mary McDonald Bachrach, and the Solicitor General representing the
Government of the Philippines, asking that the administratrix "be authorized to pay your petitioners
from and after July 1, 1940, and until they receive their share of the estate left by the deceased E.M.
Bachrach upon the death of his widow, a monthly allowance of P500, P250, P250, and P250,
respectively, and the additional sum of P3,000 to the heir Sophie M. Seifert, who is in poor health, the
said allowances to be deducted from your petitioners' share of the estate of the deceased E.M. Bachrach
upon the death of the widow." Acting upon the said petition, the Court of First Instance of Manila issued
an order dated October 2, 1940 granting the petition in the following words:
Petition granted; and the administratrix and usufructuary Mary McDonald Bachrach is hereby
authorized and instructed forthwith to pay to the said Sophie M. Seifert, Ginda M. Skundina,
Elisa Elianoff and Annie Bachrach Levine a monthly allowance of Five Hundred (P500) Pesos;
Two Hundred Fifty (P250) Pesos; Two Hundred Fifty (P250) Pesos, and Two Hundred Fifty
(P250) Pesos, respectively, beginning July 1, 1940, and until the said heirs receive their share of
the estate left by the deceased E. M. Bachrach upon the death of his widow, and the additional
sum of Three Thousand (P3,000) Pesos to the heir Sophie M. Seifert.
From July 1, 1940 to December 31, 1941, the administratrix made the payments as ordered, having paid
the total amount of P40,250. Payments during the Japanese occupation which would have amounted to
P32,500, was suspended. Then payments were resumed from August, 1945 to January, 1947. Thereafter,
the executrix declined to make further payments. The heirs petitioned the lower court for a writ of
execution, ordering the administratrix to pay the allowances for February, 1947 and those in arrears for
the period comprising from January 1, 1942 to July 31, 1945. This petition was denied and the heirs
filed a petition for mandamus in the Supreme Court under G. R. No. L-1379. 1 The petition for
mandamus was granted by this Court and the lower court was ordered to proceed in the execution of its
order of October 2, 1940 and to issue the proper writ.
In the meantime, the administratrix Mary McDonald Bachrach, filed in the same case No. 51955 in the
Court of First Instance of Manila a petition on February 19, 1947, recommending the liquidation of the
assets of the estate of her deceased husband destined for charity because due to the havoc and miseries
brought about by the last war, the charitable institutions to be benefited badly needed the property
bequeathed to them under the will.
In another petition by the same administratrix Mary McDonald filed on February 18, 1947, she alleged
that under the order of the court of October 2, 1940, she had already paid to the heirs P40,250; that
besides that amount the heirs were demanding the amount of P32,500 representing the allowances that
had accrued during the Japanese occupation while the estate was financially and economically prostrate;
that the allowances paid to said heirs were taken from the fruits and income of the estate which belong
exclusively to her as a usufructuary, that is to say, that the allowances paid to the heirs were advances
from her personal funds; and that unless the heirs gave sufficient security for the protection of the
administratrix, the of the property corresponding to the heirs which consists mainly of shares of stock,
when sold later, may not be sufficient to reimburse her estate after her death for the allowances made or
given to the heirs from her personal funds. On the basis of said allegations, the administratrix prayed the
court that she be relieved from the obligation to pay the heirs the monthly allowances ordered by the
court in its order of October 2, 1940, and in the alternative, in the event that the court ordered her to
continue the payments of said allowances, that she be authorized to sell as much of the assets of the

destined for the instituted heirs as may be necessary to enable her to continue the payment of said
allowances.
Evidently, acting upon these two petitioners, the lower court issued its order dated February 27, 1947,
expressing its opinion that pending the determination of the proceedings, it would be advisable to sell
the property destined for charities but also the one-half adjudicated to the instituted heirs, the proceeds
thereof, to be distributed accordingly later on. Acting upon a motion for reconsideration filed on behalf
of the heirs, the lower court denied said motion, justifying its order sought to be reconsidered with the
allegation that the case had been pending for several years: that the sale of said properties included in the
testate proceedings and distribution of the proceeds of the sale to the beneficiaries was one way of
winding up said proceedings and the beneficiaries would be benefited in that they would receive their
shares earlier. The heirs appealed from that order of February 27, 1947, and the order denying their
motion for reconsideration. That appeal under G.R. No. L-1592 of this Court, is now the case under
consideration.
Our first impression was that the appellants had no valid reason for objecting to the sale of the of the
estate adjudicated to them because in that way they would receive their shares earlier; furthermore, that
the administratrix was warranted in asking for the sale of said of the property adjudicated to the heirs
or as much thereof as was sufficient to reimburse for the allowances being paid by her to the heirs from
her personal funds or from the fruit of the said which, as a usufructuary, be longed to her. Upon a
closer scrutiny of the record however, not only of this case (G. R. No. L-1592) but also of G. R. No. L1379 of which we take judicial notice, for which reason, said last case was cited and referred to for
purposes of background so as to give a clear understanding of the facts in this case, we find that the
allowance being paid to the heirs are really not paid from the personal funds of the administratrix but
from the cash corresponding to the of the estate adjudicated to the heirs, which cash, is deposited in
the bank. According to the decision of the Supreme Court in the mandamus case (G. R. No. L-1379)
promulgated on December 19, 1947, the administratrix had in her possession the sum of P351,116.91
which has already been adjudicated to and belongs, although pro indiviso, to the heirs of the deceased E.
M. Bachrach and that furthermore, the monthly allowances being paid to the heirs or due them should be
paid from this sum and not from the personal funds of the administratrix Mary McDonald Bachrach.
Furthermore, the very order of the lower court of October 2, 1940, authorizing the administratrix to pay
to the heirs the monthly allowances already mentioned, stipulated in its fourth paragraph that said
allowances should be taken from the properties to be turned over to the heirs of the deceased E. M.
Bachrach and shall be deducted from the share of said heirs upon the death of the widow..
In the opinion of this Court, the cash in the possession of the administratrix corresponding to the of
the estate adjudicated to the heirs is sufficient for the monthly allowances being paid to the heirs and that
there is no necessity for the sale of the of the estate corresponding to them. The main objection to the
heirs to the sale of of the estate adjudicated to them, which besides the cash already mentioned,
consist mostly of shares of stock, is that said shares if sold now may not command a good price and that
furthermore said heirs prefer to keep said shares intact as long as there is no real necessity for their sale.
Of course, once said cash in the hands of the administratrix, corresponding to the heirs is exhausted
because of the payment of the allowances made to the heirs, some other arrangements might be
necessary. The administratrix would then have a right and reason to refuse the payment of said
allowances from her said personal funds or from the fruits of the estate, which as a usufructuary, belong

to her during her lifetime. But, until that point is reached, we see no valid reason for ordering the sale of
the of the estate belonging to the heirs over their objection.
In view of the foregoing, the order appealed from, insofar as it directs the sale of the one-half share of
the estate destined and adjudicated to the instituted heirs, is hereby reversed. With costs.
Moran, C.J., Ozaeta, Paras, Feria, Bengzon, Tuason, Reyes and Torres, JJ., concur.
Padilla, concurs in the result

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. MARY 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 capital or part of the
corpus of the estate, which pertains to the remainderman? That is the 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 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 the 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 her the said 54,000 share of stock dividend by endorsing 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 was not income but formed part of the capital and therefore belonged not to the usufructuary
but to the remainderman. And they have appealed from the order granting the petition and overruling
their objection.

While appellants admits 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 true sense any
dividend at all since it involves no division or severance from the corporate assets 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 nothing to the interests of the shareholders.
On the other hand, 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.
(Earp's Appeal, 28 Pa., 368.)
. . . It is clear that testator intent the remaindermen should have only the corpus of the estate he
left in trust, and that all dividends should go 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, in 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 profits and loss account to that representing
capital stock; and really a corporation has no right to 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
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
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. And articles 474 and 475
provide as follows:
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 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.lawphil.net
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, his
hereby affirmed, with costs against the appellants.
Moran, C. J., Paras, Feria, Pablo, Bengzon, Tuason, Montemayor and Reyes, JJ., concur.