Well you hit the nail in the head. I had a System.exit() in one exception handler for some reason that I cannot fathom.
So in fact the whole thread is pointless, java exceptions did NOT crash the server but my code caused the server to shutdown with the aforementioned System.exit.
I guess I thought that I can do pretty much anything in the module and the server would not be affected. Or maybe it was some remnant of the time I tested the code without eXist.
Learned a valuable lesson here :)

Thank you very much!

From: jsmith@infotrustgroup.com
To: laurihyttinen@hotmail.com; exist-development@lists.sourceforge.net
Date: Thu, 24 Feb 2011 12:31:34 -0800
Subject: RE: [Exist-development] Java exceptions crash the server

I'm not as familiar with the REST API, so I will have to defer this to others. 
You mentioned you have your own error handler.  What does it do?
This sure looks like something is shutting down the server in the normal way.  You aren't calling System.exit() in your code anywhere, by chance?

Jason Smith