Thank you sbob74 . But unfortunately no luck yet on this frustrating matter.
Bunch of strange stuff...
My server is debian 7. So..
* There is no /bin/openfire file.
* There is no file in the system that has INSTALL4J_JAVA_HOME_OVERRIDE in it so no way to uncomment it.
* Even though if I hard code java_home path in /etc/init.d/openfire script, it can't find default java in the system.
* There is no bin folder in openfire installation folder (This is strange because Openfire: Installation Guide claims that there supposed to be one)
Extra strange: Openfire ships with java 6 by default. All of a sudden, a plugin gets released that is compiled with java 7 without any prior notice (you don't know anything of it until your server actually fails). Even worse the maintainers don't even seem to care.