Error: Could not create directory
General tip: When I've had problems like this (a mysterious setting/value/datum), one other technique is to search the full database. There's no direct way to do that in MySQL, but you can dump the database to a file (mysqldump) and then search that.
Specific tip: In the Civi database, check table civicrm_setting, e.g. select * from civicrm_setting where value like '%abc%'; Equivalently, in the admin UI, check Administer =&gt; System Settings =&gt; Directories (or its sibling =&gt; Resource URLs).
Background: This may or may not be your problem, but as background/theory.


In v4.1-v4.6, directory+URL settings were stored as a mix of absolute and relative paths (but displayed as if they were always absolute paths). The problem is that absolute paths kinda suck -- they make the database less portable. Ideally, you want all the settings to be stored as relative paths.
In v4.7, the defaults and UI have changed to better encourage relative paths. The key thing is the introduction of path variables like [cms.root]. For example, the default directories in a new v4.7 installation look like http://imgur.com/RbMgyn6
v4.7 is backward-compatible with old settings. If you used an absolute path in v4.6 and upgraded, then it's still an absolute path.
If you cannot edit these things in the UI (because an error blocks it), then you can use SQL or drush cvapi setting.create. For v4.7, I'd suggest simply deleting the offending setting. (Deleted settings will go back to their defaults in 4.7.)