If directory is null, we might want to use GIT_DIR rather than ".".  So maybe instead:

  builder.readEnvironment();
  if (directory != null) {
    File d = new File(directory);
    if (!bare)
      d = new File(d, Constants.DOT_GIT);
    builder.setGitDir(d);
  } else if (builder.getGitDir() == null) {
    File d = new File(".");
    if (!bare)
      d = new File(d, Constants.DOT_GIT);
    builder.setGitDir(d);
  }