kholdstaire won his battle.
I don't see any other way of handling it really. This is far from optimal, I agree. However, a ridiculous amount of the loser's bracket would be inactive. As it is, there are a couple people in the winner's bracket who are still inactive, but thankfully they will be removed after one round. If a large number of inactives were placed in the loser's bracket, they could clog up the tournament for many more rounds.
I'm very sorry to the people who lost in the first round. If instead of complaining somebody could come up with a feasible solution, that would be lovely.