Sheriff Sam Deeds (Chris Cooper) is the county sheriff in Frontera, Texas, a fictional border town in the fictional Rio County. Sam has little enthusiasm for his job and the local politics that go with the job. Sam got the job because his late father was the popular and legendary Sheriff Buddy Deeds (Matthew McConaughey), who is remembered as fair and just by the citizens of Rio County. However, Sam had many problems with his father and the pair routinely argued and fought.
Sam is particularly disapproving of efforts by Mayor Hollis Pogue (Clifton James), Buddy's chief deputy and best friend, and business leader Mercedes Cruz (Míriam Colón), to rename the local courthouse in Buddy's honor. As a teenager, Sam had been in love with Mercedes' daughter Pilar (Elizabeth Peña), but the courtship was opposed by both of their parents. After a chance meeting at the courthouse dedication ceremony, Sam and the now-widowed Pilar slowly resume their courtship.
Colonel Delmore Payne (Joe Morton) has recently arrived in town as the new base commander of the local U.S. Army base. Delmore is the son of Otis "Big O" Payne (Ron Canada), a local nightclub owner and leading figure in the area's African-American community. The two are estranged because of Otis' serial infidelity and abandonment of Delmore's mother when Delmore was a child. One day, some of Delmore's men discover a human skeleton on an old shooting range along with a Masonic ring, a Rio County sheriff's badge, and a bullet not used by the military. Sam brings in Texas Ranger Ben Wetzel to help with the case. Wetzel tells Sam that the forensics identify the skeleton as that of Charlie Wade (Kris Kristofferson), the notoriously brutal and corrupt sheriff who preceded Buddy. Sam and Wetzel recall the famous story known throughout the border region of how one night in 1957 Charlie Wade mysteriously disappeared with $10,000 in county funds and Buddy took over as sheriff shortly thereafter.
As Sam investigates the events leading up to Wade's apparent murder he learns how Wade terrorized the local African-American and Mexican community, including murdering Mercedes Cruz' husband Eladio, whom he shot after catching Eladio smuggling illegal Mexican immigrants into Rio County. Sam learns from the widow of Roderick Bledsoe, the former owner of Otis Payne's club, that Wade extorted money from them and other local businesses. She informs Sam that a young Otis had a run in with Wade, who nearly shot Otis but was saved by Roderick. Otis informs Sam that Buddy, while popular with the local community, was also corrupt and used political patronage to help enrich his friends and political allies to ensure his reelection as sheriff. Sam later meets an Indian tourist salesman who reveals that Buddy settled down after serving in the Korean War due to becoming a deputy sheriff and marrying Sam's mother. The Indian salesman confirms that Buddy had a mistress and that half of Rio County knew about the affair, but Sam's mother refused to leave Buddy. Sam travels to San Antonio, where he visits his ex-wife Bunny (Frances McDormand) and searches through his father's private things, where he discovers love letters to Buddy's mistress.
Late one night Sam returns to Frontera and confronts Hollis and Otis about the murder of Charlie Wade. Hollis and Otis reveal the truth of Charlie Wade's disappearance: Wade discovered that Otis was running an illegal gambling operation in the bar, something Otis had previously denied to Wade. Buddy arrived just as Wade was about to murder Otis but was shot by Hollis. Otis, Hollis, and Buddy buried Wade's body on the U.S. Army shooting range and took the $10,000 from the county and gave it to Eladio Cruz's poverty stricken widow Mercedes Cruz, who Hollis reveals was Buddy's mistress, to buy her restaurant. Sam declines to press charges against Hollis and Otis, saying it will remain an unsolved mystery, but when Hollis voices concern that Buddy's reputation will be tarnished if the skeleton is revealed to be Charlie Wade, Sam simply states Buddy's legend can handle it.
The next morning Pilar meets Sam at an abandoned drive-in movie, where he reveals that her alleged father, Eladio Cruz, was killed one year and a half before Pilar's birth. Sam shows Pilar an old photo of Buddy and Pilar's mother, thus revealing that her real father is Buddy. Both are hurt over the deception of their parents but decide that they want to continue their romantic relationship, despite the newfound knowledge that they are half-siblings.