Doctrine
While it is true that the family home is constituted on a house and lot from the time it is occupied as a family residence and is exempt from execution or forced sale under Article 153 of the Family Code, such claim for exemption should be set up and proved to the Sheriff before the sale of the property at public auction. Failure to do so would estop the party from later claiming the exemption.
Facts
Spouses Edgar and Marlinda Pelayo, married in 1976, owned a residential house and lot in Bogo City, Cebu, where they raised their four children: Chris, Mary Ann, Catherine (respondents), and Ian. Following Edgar’s death in 2004, the heirs executed an Extra-judicial Declaration of Heirs with Waiver of Rights (“EJS”) on March 31, 2008. In this document, Marlinda and the respondents waived all their rights and interests in the property in favor of the fourth sibling, Ian Pelayo, who then became the exclusive owner.
Ian later used the property as collateral for a loan from Banco Maximo, Inc. When Ian defaulted on the loan, the bank extrajudicially foreclosed the mortgage. At the public auction on January 24, 2012, Banco Maximo emerged as the highest bidder. After failed attempts to redeem the property, the respondents (Chris et al.) filed a complaint to nullify the mortgage and foreclosure, arguing that the property was a family home and was thus exempt from execution under the Family Code.
The Regional Trial Court dismissed the complaint, ruling that the respondents lacked legal standing and that the “family home” status was lost when the lot became Ian’s exclusive property. The Court of Appeals reversed the RTC, nullifying the mortgage and even the extrajudicial settlement.
ISSUE: Whether the property is exempt from execution as a “family home” under the Family Code.
Ruling
The Supreme Court granted the petition of Banco Maximo, Inc., reversing the CA and reinstating the RTC decision. The Supreme Court clarified that the exemption of a family home from execution is not absolute and does not apply to debts secured by mortgages on the property itself.
“Article 155 of the Family Code expressly provides that family homes are not exempt from execution for debts secured by mortgages on the premises—whether constituted before or after the family home itself. In other words, one cannot mortgage a property, enjoy the proceeds, and later repudiate the obligation by invoking the very home that was offered as security.”
Furthermore, the Supreme Court held that the family home exemption must be timely and properly asserted by a party with legal standing. Chris et al. had already waived their rights to the property in favor of Ian through the EJS before the mortgage was executed, and thus lacked standing to challenge the mortgage and foreclosure.
“The family home exemption is not automatic… its exemption from execution must be timely and properly asserted. Jurisprudence has long required that the claim be raised before the sheriff and prior to the auction sale. To sleep on this right is to lose it.”
The Supreme Court also found that Banco Maximo, as mortgagee, acted in good faith, relying on the tax declaration showing Ian as sole owner, with no notice of any adverse claim or family home exemption.
In sum, the Supreme Court found that the family home exemption was neither properly invoked nor available to the respondents, who had already relinquished all ·interest in the property. The CA erred in annulling the real estate mortgage and foreclosure based on grounds not properly raised, thereby prejudicing the rights of an innocent mortgagee and undermining the sanctity of contractual obligations.