I give up. But found a better workaround and that might just actually be what I have done in the first place to get it working.
Turns out the jdbc-derby gem doesn't have the derbyclient network driver but only the embedded driver. Thus the class not found. I tried many things and thinking some combinations of the gems that I added trying to get it work corrupted something. But still no dice. I ended up cleaning out the jruby again from RVM. And then go on to manually removing the corresponding gem directory (.rvm/gems).
One thing I encountered amid the removal and reinstall was getting the following err when trying to run bundle command:
......ruby_noexec_wrapper:7:in `require': no such file to load.......
Solution was to set the default ruby again from rvm with the "--default" option.
And finally the workaround is..... just stick the derbyclient driver in the ".rvm/rubies/jruby-1.7.2/lib" directory and that loaded automatically and I don't have problem with intellij anymore that way.
If anyone knows how to solve this more elegantly, please let me know. My gut feeling tells me it might involve a new gem or something, which I don't know how to make yet.
Joseph